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Gio Renzo M.

Caballero
Justine Carlo S. Elepao
Joseph Ronald M. Reyes

Income Elasticity of Demand

I.

Definition
Income elasticity of demand is the measurement of the responsiveness in the
demand of a good or commodity given a change in the consumers level of
income.

II.

Equations
A. General Equation

III.

Types of Goods
The through income elasticity of demand, the goods can be classified
according to how the change in income affects the demand for them.
A. Normal Goods
Normal goods are commodities whose demand increases along with
increase in the consumers income. They are those goods whose income
elasticity for demand is positive. These goods can be further classified
according to the intensity of change in demand with corresponding
changes in consumers income.
1. Necessity
These are average goods that consumers use on a daily basis. They
are commodities that people buy to meet their daily needs.
Examples of these goods are meat, vegetables, fish, and bath
soaps. These are goods that get slight increases in demand (sales)
as income of consumers increase. In computation, these are goods

that have income elasticity of demand with values ranging from


zero to one.
2. Luxury
These are goods that people can only afford to buy whenever they
get an increase in their income. They are commodities that people
like to buy but not necessarily need them as daily requirements,
and are often those expensive items. Examples of these goods are
premium chocolates, fine wines, international air travels, and
designer clothes. They are those kinds of goods that increase their
demand (sales) greatly as income increases. In computation, these
goods have an income elasticity of demand that is beyond 1.
B. Inferior Goods
These goods are the opposite of normal goods, meaning that they
decrease in demand given an increase in consumers income. These are
often cheap goods that people use as substitutes for normal goods
whenever they are on tight budgets. Common examples of this type of
goods are canned goods and instant noodles. Another good example of
this is the pawnshop service, wherein people pawn their possessions in
exchange for money, usually when they are low in income. In
computation, these goods have an income elasticity of demand which is
negative.