Concept Of Income Elasticity Of Demand
The income elasticity of demand shows the responsiveness of quantity demanded of a certain commodity to the change in income of the consumer. The income elasticity of demand is also defined as ' the ratio of the percentage change in the demand for a commodity to the percentage change in income'. Income elasticity of demand can be expressed as follows:
Income elasticity (ey) = Percentage change in quantity demanded / Percentage change in income
For example, consumer's income rises from $ 100 to $ 102, his demand for good X increases from 25 units per week to 30 units per week then his income elasticity of demand X is:
ey = 5/25 x 100/2 = 10
It means that 1 percent increase in income results 10 percent increase in demand and vice versa.
The income elasticity may be positive or negative or zero depending upon the nature of a commodity. As a rise in income leads to an increase in demand, the income elasticity is positive. A commodity which has positive income elasticity is a normal good. On the other hand, when a rise in income leads to a decrease in demand for a commodity, its income elasticity is negative. Such a commodity is called inferior good. If the quantity of a commodity purchased remains unchanged, even at the change in income, the income elasticity of demand is zero.
Types Of Income Elasticity Of Demand
There are five types of income elasticity of demand as follows:
1. Income elasticity greater than unity (ey>1)
The income elasticity of demand is greater than the unity when the demand for a commodity increases more than percentage rise in income.
2. Income elasticity less than unity(ey< 1)
Income elasticity of demand is less than the unity when the demand for a commodity increases less than proportionate to the rise in income.
3.Income elasticity equal to unity (ey=1)
Income elasticity is unity when the demand for a commodity increases in the same proportion as the rise in income.
4. Zero income elasticity (ey=0)
If the rise in income, the quantity demanded remains unchanged, the income elasticity is called zero income elasticity.
5. Negative income elasticity (ey <0>
In the case of inferior goods, the income elasticity of demand is negative. The consumer will reduce his purchase of it when income rises and vice versa.
