Income Elasticity of Demand

It compares the percentage change in quantity demanded with the percentage change in income. The result shows how a product's sales are likely to change as people become richer or poorer.

If income rises by 10% and demand for a product rises by 5%, its income elasticity is 0.5. It is a normal good, because demand rises with income, and a necessity, because demand rises less than proportionally. If demand rises by 20%, the elasticity is 2, which is typical of luxury goods such as foreign holidays or fine dining.

If demand falls when income rises, the income elasticity is negative and the product is an inferior good. For example, if incomes rise 10% and demand for a basic, low-cost brand falls by 5%, the income elasticity is −0.5. People switch to more expensive alternatives as they can afford them.

Businesses use income elasticity to anticipate how sales will change through economic booms and recessions. Companies selling luxury goods tend to see bigger swings in sales than those selling everyday necessities.