# Income elasticity of demand

The income elasticity of demand seeks to measure the proportion in the variation of the demand for a good, compared to changes in the income levels of consumers. When, in real terms, the income of consumers increases, their purchasing power expands. This results in greater purchases of goods and services.

The income elasticity of demand tries to measure these changes. The concept of income elasticity of demand is often referred to by various writers as income elasticity.

Depending on how the income levels of consumers vary, the demands of some goods can rise considerably. Considering the proportion of the real increase in income that individuals will spend on acquiring goods is what the income elasticity of demand is intended to provide.

## Importance of income elasticity of demand

The importance of this concept lies in the fact that depending on the value of the income elasticity coefficient, it is possible to arrive at a classification of economic goods. Thus, its importance is powerful, it allows to know in depth the behavior of the consumer.

## Formula for calculating income elasticity of demand

The income elasticity is obtained by dividing the percentage change in the quantity demanded of a good by the percentage change in income. Therefore, its expression is the following:

## Income elasticity and types of economic goods

In consequence of the changes experienced in the income levels of individuals or consumers and taking into account the income elasticity coefficient, we come to know economic goods. Let’s see its classification:

• Normal goods: They are those in which the income elasticity has positive values:
• Luxury goods: They are those whose income elasticity maintains values ​​greater than one.
• Inferior goods: It is said like this, to economic goods in which the income elasticity has negative values.
• Staples: These goods are those that have positive elasticity, but less than one.

## Example of calculation with income elasticity of demand

Through the example that we are going to give below, we will know the process of calculating income elasticities of demand. In this sense, we are going to assume that the average income of the consumer increases from 2,900 euros to 2,940. In view of this increase in income, consumers buy 42 kilos of beef, instead of the 41.95 kilos they bought prior to the increase in income.

To determine the coefficient of elasticity of income elasticity of demand, we are going to use the formula previously proposed. This is the following:

Step 1: This step is to determine the top of the formula. That is, the percentage change in the quantities.

1. We determine the absolute change in quantities, which is obtained by subtracting the final demand minus the initial demand. This is: 42 – 41.95 = 0.05.
2. We now divide this value by the initial demand. Thus we have the following: 0.05 / 41.95 = 0.0012, which, taken as a percentage value, is equal to 0.0012 x 100 = 0.12%.

This 0.12% then represents the percentage variation of the quantities demanded. That is, we have determined the upper part of the formula.

Step number 2: This step is to determine the bottom of the formula. That is, the percentage change in income.

1. We determine the absolute change in income, which is obtained by subtracting final income minus initial income. This is 2,940 – 2,900 = 40.
2. We now divide this value by the initial income. Thus we have the following: 40 / 2,900 = 0.0137, which, taken as a percentage value, is equal to 0.0137 x 100 = 1.4%.

This 1.4% then represents the percentage change in income. That is, we have determined the lower part of the formula.

Step number 3: In this final step we proceed to substitute the values ​​determined in step one and step two in the formula for income elasticity of demand. Let’s see:

So the income elasticity coefficient is less than one, in a positive range. This is a necessity good, since its coefficient of elasticity is less than one on a positive scale. Furthermore, this result implies that for every 1% that income increases, the quantity demanded of these goods increases by 0.086%.