What is the formula for calculating income elasticity of demand?
The formula for calculating income elasticity is:
% Change in demand divided by the % change in income
Explain Normal Goods
The formula for calculating income elasticity is:
% Change in demand divided by the % change in income
Explain Normal Goods
- Normal goods have a positive income elasticity of demand so as consumers' income rises more is demanded at each price i.e. there is an outward shift of the demand curve
- Normal necessities have an income elasticity of demand of between 0 and +1 for example, if income increases by 10% and the demand for fresh fruit increases by 4% then the income elasticity is +0.4. Demand is rising less than proportionately to income.
- Luxury goods and services have an income elasticity of demand > +1 i.e. demand rises more than proportionate to a change in income – for example a 8% increase in income might lead to a 10% rise in the demand for new kitchens. The income elasticity of demand in this example is +1.25.
- Inferior goods have a negative income elasticity of demand meaning that demand falls as income rises. Typically inferior goods or services exist where superior goods are available if the consumer has the money to be able to buy it. Examples include the demand for cigarettes, low-priced own label foods in supermarkets and the demand for council-owned properties.
