Chapter 18: Income Elasticity of Demand
Definition of income elasticity of demand:Income elasticity of demand measures the
relationship between a change in quantity demanded for good X and a change in real income.
The formula for calculating income elasticity: % change in demand divided by the % change in
Normal Goods: Normal goods have a positive income elasticity of demand so as consumers’
income rises, so more is demanded at each price level i.e. there is an outward shift of the demand
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.
Luxuries have an income elasticity of demand > +1 i.e. the demand rises more than
proportionate to a change in income – for example a 8% increase in income might lead to
a 16% rise in the demand for restaurant meals. The income elasticity of demand in this
example is +2.0. Demand is highly sensitive to (increases or decreases in) income.
Inferior goods have a negative income elasticity of demand. Demand falls as income rises.
Typically inferior goods or services tend to be products where there are superior goods
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
The income elasticity of demand is usually strongly positive for
Fine wines and spirits, high quality chocolates (e.g. Lindt) and luxury holidays overseas.
Consumer durables - audio visual equipment, 3G mobile phones and designer kitchens.
Sports and leisure facilities (including gym me