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Income elasticity of demand

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In economics, income elasticity of demand measures the responsiveness of the demand for a good to a change in the income
Main page of the people demanding the good. It is calculated as the ratio of the percentage change in demand to the percentage change in
Contents income. For example, if, in response to a 10% increase in income, the demand for a good increased by 20%, the income
Featured content elasticity of demand would be 20%/10% = 2.
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Donate 1 Interpretation
2 Mathematical definition
Interaction
3 Selected income elasticities
About Wikipedia
4 See also
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5 Notes
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6 References
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Interpretation [edit]

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A negative income elasticity of demand is associated with inferior goods; an
increase in income will lead to a fall in the demand and may lead to changes to
Languages more luxurious substitutes.
Deutsch A positive income elasticity of demand is associated with normal goods; an
Magyar increase in income will lead to a rise in demand. If income elasticity of demand of
Nederlands a commodity is less than 1, it is a necessity good. If the elasticity of demand is
Polski greater than 1, it is a luxury good or a superior good.
Português A zero income elasticity (or inelastic) demand occurs when an increase in income Inferior goods' demand falls as consumer
中文 is not associated with a change in the demand of a good. These would be sticky income increases.
goods.
Income elasticity of demand can be used as an indicator of industry health, future consumption patterns and as a guide to firms
investment decisions. For example, the "selected income elasticities" below suggest that an increasing portion of consumer's
budgets will be devoted to purchasing automobiles and restaurant meals and a smaller share to tobacco and margarine.[1]

Mathematical definition [edit]

More formally, the income elasticity of demand, , for a given Marshallian demand function for a good is

or alternatively:

This can be rewritten in the form:

With income I, and vector of prices . Many necessities have an income elasticity of demand between zero and one:
expenditure on these goods may increase with income, but not as fast as income does, so the proportion of expenditure on
these goods falls as income rises. This observation for food is known as Engel's law.

Selected income elasticities [edit]

Automobiles 2.46[2]
Books 1.44
Restaurant Meals 1.40
Tobacco 0.64
Margarine -0.20
Public Transportation -0.36[3]
Income elasticities are notably stable over time and across countries.[4]

See also [edit]

Price elasticity of demand (PED)

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 Price elasticity of supply (PES)

Notes [edit]

1. ^ Frank, Robert (2008).p. 125

2. ^ Samuelson; Nordhaus (2001). p.94.
3. ^ Frank (2008) 125.
4. ^ Perloff, J. (2008). p.105.

References [edit]
Perloff, J. (2008). Microeconomics Theory & Applications with Calculus. Pearson. ISBN 9780321277947.
Samuelson; Nordhaus (2001). Microeconomics (17th ed.). McGraw-Hill.
Frank, Robert (2008). Microeconomics and Behavior (7th ed.). McGraw-Hill. ISBN 978-007-126349-8.

Categories: Consumer theory

This page was last modified on 30 August 2010 at 20:11.

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