Income Elasticity of Demand

Statement

Income elasticity of demand (YED) measures the degree of responsiveness of demand to a change in income of consumers, ceteris paribus.

Notes

YED is calculated as

$YED = \frac{\%\,\text{change in quantity demanded}}{\%\,\text{change in income}}$

The sign classifies the good: normal goods have positive YED (demand rises with income), splitting into necessities ($0 < YED < 1$) and luxuries ($YED > 1$); inferior goods have negative YED ($YED < 0$, demand falls as income rises). Whether a good is normal, inferior or luxury depends on the consumer’s income level, so YED values are sensitive to the affluence of the economy. How YED shapes the demand response to rising income is set out in applying YED.