Income Elasticity of Demand This is our Second Elasticity

Income Elasticity of Demand uIncome elasticity of demand measures how much the quantity demanded of a good responds to a change in consumers’ income. uIt is computed as the percentage change in the quantity demanded divided by the percentage change in income.

Computing Income Elasticity Income Elasticity of Demand Percentage Change in Quantity Demanded Percentage Change in Income = *Because we will not be using graphs with this elasticity and it can be negative, we will not be using the midpoint formula

Income Elasticity - Types of Goods - uHigher income raises the quantity demanded for normal goods but lowers the quantity demanded for inferior goods. 0 — + Inferior Normal (at 0 there is no relevant correlation)

Income Elasticity - Types of Goods - uGoods consumers regard as necessities tend to be income inelastic Examples include food, fuel, clothing, utilities, and medical services. uGoods consumers regard as luxuries tend to be income elastic. Examples include sports cars, furs, and expensive foods.