# Income Elasticity of Demand – Concept and Types

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.

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