Income elasticity of demand refers to the degree of responsiveness of demand to changes in income of consumers. It measures how changes in income of consumers will affect the quantity of commodities demanded by such consumers. Income elasticity of demand is negative for inferior goods sine an increase in income will leads to a decreased demand for them. Income elasticity of demand is measured thus, co-efficient of income elasticity of demand = %change in quantity demand /% change in income.
TYPES OF INCOME ELASTICITY OF DEMAND
- Positive income Elasticity of demand. Income elasticity is said to be positive if an increase in income of consumers leads to increase in the quantity demand. This applies to normal commodities.
- Negative income Elasticity of Demand: if an increase in income of consumers leads to decrease in quantity of goods and services demand, income elasticity is said to be negative. In such a situation, demand falls as income of consumers rises. This applicable to inferior goods
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