Income elasticity of demand is the change in quantity demanded brought by the change in income of the consumer. So, income elasticity of demand can be properly defined as “The degree of responsiveness of the quantity demanded to a change in income of the consumer, other things being constant.”
This is is one of the types of elasticity of demand. As it is quite obvious that demand of the consumer is not affected by price only. When the demand for the goods by the consumer changes as a result o the change in his income. This type of elasticity of demand is called income elasticity of demand.
we can calculate this by using the formula;
YED= Percentage change in quantity demanded/percentage change in income.
Types of Income Elasticity of Demand:
Based on these differences and numerical values we categorize it into the following groups;
Positive Income Elasticity of demand
When the change in quantity demanded increases due to increase in income or decreases because of the decrease in income. We get a positive value for income elasticity of demand. The positive elasticity of demand means the good is a normal good. we can further be classified into the following groups;
Unitary income Elasticity of Demand:
When the proportionate change in quantity demanded is exactly equal to the proportionate change in income. The value of income elasticity of demand will be equal to one (YED=1). This type of elasticity is unitary income elasticity of demand. For example, if there is 20% increase in income, the demand also rises by the same percentage i.e. 20%.
Income Elasticity of Demand Greater than One:
When the proportionate change in quantity demanded is greater than the proportionate change in income. The elasticity of demand would be greater than one. For example, if the income increase by 20%, the demand rises by 60%. The numerical value you get here will be greater than one i.e. YED>1
Income Elasticity of Demand less than One:
When the proportionate change in quantity demanded is less than the change in income. The elasticity of demand would be less than one. For example, if the income increases by 40% and demand increase only by 10%. The numerical value we get will be less than one i.e. YED<1.
Negative Income Elasticity of Demand
When the quantity demanded of the good decreases due to an increase in income and increases as result of the decrease in income level. we will a negative value for this. A negative income elasticity of demand means the good is an inferior good.
Zero Income Elasticity of Demand
When there is no effect of income increase on the consumer demand. This is mostly the case of essential goods I.e. slat. The quantity demanded is same by all the income groups. The numerical value we get for the elasticity of demand is zero i.e. YED=0.
Income Elasticity of Demand Importance/Significance
- It will be beneficial for the marketers. They devise their strategy as per the demand of the product. For example, a firm who is producing luxury goods will be more focused on advertising through media because they target the people from high-income groups.
- The investors will invest their capital in a place where they feel that the demand for the product increases more proportionately with the increase in income. So, they will invest in goods where the elasticity of demand is greater than one. It mostly happens in case of normal or durable goods. Such as refrigerator, TV, and other appliances. This is because, the due to an increase in national income, the demand for such good increase. Thus, sellers can earn a reasonable amount of profit.
- The demand elasticity will help us in classifying the goods. So, it can easily be used to define the goods as normal or inferior goods. Simply, the goods with positive income elasticity are normal goods. Opposite to that, goods having the negative income elasticity of demand are definitely the inferior goods.