Income Elasticity of Demand

 

What exactly is Income Elasticity of Demand? Today we will try to understand this term.

Income Elasticity is a measure of change in demand as compared to the subsequent change in Income. It is a measure of proportionate change in the quantity demanded of a commodity in response to a proportionate change in income. While calculating income elasticity no other factors are considered. It can be represented in formula form.

Elasticity of demand may be of the following types:

Unitary Elastic Demand (Elasticity is equal to 1): In unitary elastic demand proportionate change in Income and the proportionate change in demand are equal.

The percentage change in demand and percentage change in income are equal in this case. Therefore the Elasticity is unitary.

Relatively Elastic Demand (Income Elasticity is greater than 1): In relatively elastic demand percentage in demand is more than a relative percentage change in Income.The percentage change in demand is more than percentage change in Income.

Relatively Inelastic Demand (Price Elasticity is less than 1): In relatively inelastic demand percentage in demand is less than a relative percentage change in Income.

Overall the demand of a commodity will increase with increase in Income. So, Income is directly proportional to the demand for a commodity.