High School
SAT
ACT
University
MCAT
LSAT
DAT
Wize University Microeconomics Textbook > Elasticity

Income Elasticity

Perfectly Elastic and Inelastic Previous Section
Cross Price ElasticityNext Section
Popular Courses
Find My Course
0:00 / 0:00

Income Elasticity

The income elasticity of demand tells us whether a good is normal or inferior.


Income Elasticity of Demand= %ΔQ%ΔI = ΔQΔI⋅IQ\boxed{\text{Income\ Elasticity\ of\ Demand} =\ \frac{\%ΔQ}{\%ΔI}\ =\ \frac{ΔQ}{ΔI}\cdot\frac{I}{Q}}

Normal Goods

The income elasticity of normal goods is
positive (>0)
. As your income increases you will buy
more
normal goods (positive relationship).

There are two types of normal goods:
  1. Normal and Necessity Goods - Income elasticity is positive and less than 1 Example If your income doubles, you might spend a little bit more on necessity goods (like water or bottled water), but not double.
  2. Normal and Luxury Goods - Income elasticity is positive and greater than 1 Example If your income doubles, you will spend more than double on luxury goods (like nice clothes and eating out at nice restaurants).

Inferior Goods

The income elasticity of inferior goods is
negative (<0)
. As your income increases, you will buy
less
inferior goods (negative relationship).


0:00 / 0:00

Example: Income Elasticity

Suppose Yasmine's income rises by 20% and as a result her quantity consumed of coffee rises from 75 to 85.


a) What is her arc income elasticity of demand?


Average % ΔQ=(New−Old)​Average⋅100=(85−75)​80⋅100=12.5%Average\ \%\ ΔQ=\frac{(New−Old)​}{Average}⋅100=\frac{(85−75)​}{80}⋅100=12.5\%


Arc Income Elasticity of Demand=Average %ΔQ​Average %ΔI=12.5%20%​=0.625Arc\ Income\ Elasticity\ of\ Demand=\frac{Average\ \%ΔQ​}{Average\ \%ΔI}=\frac{12.5\%}{20\%}​=0.625


b) Based on your answer, what type of good is coffee?

This is a normal and necessity good since income elasticity is positive and less than 1.






Practice: Income Elasticity

It is safe to assume that the income elasticity of demand for gourmet meals would be ________ the income elasticity of demand for meals from a junk-food restaurant.