How to Calculate Income Elasticity of Demand

Income elasticity of demand = %Δ quantity demanded ÷ %Δ income. Positive means a normal good; negative means an inferior good.

Formula

YED = %ΔQd ÷ %Δincome. YED > 0 → normal good (0–1 necessity, > 1 luxury); YED < 0 → inferior good.

Steps

1
Find the % change in income. The change in consumer income, as a percentage.
2
Find the % change in quantity demanded. How much quantity demanded responds at the same price.
3
Divide. YED = %ΔQd ÷ %Δincome. Keep the sign.
4
Classify the good. Positive = normal good; greater than 1 = income-elastic (luxury), between 0 and 1 = necessity. Negative = inferior good.

Worked example

Income rises 5% and quantity of restaurant meals demanded rises 10%: YED = 10% ÷ 5% = +2 → a normal, income-elastic (luxury) good. If income rises 10% and instant noodle purchases fall 3%, YED = −3% ÷ 10% = −0.3 → inferior good.

Frequently asked questions

What is an inferior good?

A good people buy less of as income rises (YED < 0), like bus rides or generic brands — buyers switch to preferred alternatives when they can afford them.

How does income elasticity connect to shifts in demand?

For a normal good, higher income shifts demand right; for an inferior good, higher income shifts demand left. YED measures the size of that response.

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Definition

Income Elasticity of Demand →

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