Income elasticity of demand

The income elasticity () of demand indicates how much the demand for a commodity relative changes when change the income of a household ( relative).

It is defined as the percentage change in the quantity demanded per percentage change in income.

For example, if increased as a result of an increase in income of 10% of the demand for a particular good by 12%, the income elasticity of this material 1.2.

Formal definition and classification

Formal: Be ​​the Marshallian demand for a commodity as a function of the prices of all goods and household income. Then for the Einkommenselastizizät:

Weighted one. , The income elasticities for a good with the proportionate share of the estate in the total income of the household has, and summed these weighted income elasticities of all goods, they must add up to 1 So Hence we have:

Properties

Is the income elasticity is positive, it is called a normal good; if it is negative, from a inferior good. It is sometimes assuming further distinction between different types of normal goods: A good whose demand disproportionately on an income increase increases to income and thus has an income elasticity greater than 1 is called a luxury item; demand increases under proportional to income and so is the income elasticity between 0 and 1, one speaks of a necessary good ( see Figure 1).

There are common to the different elasticity ranges also other names; this to the article Inferior Good # Divergent definitions referenced.