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.
The Income Elasticity formula
Calculator
Enter the % change in income and in quantity demanded; get YED and the good's classification.
How much income moved (up 5% in the example).
The response at the same price (restaurant meals, up 10%). Negative if buyers take less as income rises.
A 1% rise in income raises quantity demanded by 2%, faster than income itself, so this is an income-elastic luxury that a recession hits hard.
- Classification
- Normal good (luxury)
- Change in quantity demanded per 1% rise in income
- 2%
How to calculate Income Elasticity, step by step
- 1Find the % change in income. The change in consumer income, as a percentage.
- 2Find the % change in quantity demanded. How much quantity demanded responds at the same price.
- 3Divide. YED = %ΔQd ÷ %Δincome. Keep the sign.
- 4Classify the good. Positive = normal good; greater than 1 = income-elastic (luxury), between 0 and 1 = necessity. Negative = inferior good.
Worked example: Income Elasticity
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.
Income Elasticity 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.
Get AP Econ exam tips in your inbox
Occasional emails with study tips, new interactive graphs, and exam-season reminders. Free, no spam.
No spam. Unsubscribe anytime. Read our privacy policy.
Keep track of what you have studied
A free EconLearn account adds progress tracking, your quiz history, and achievements. Studying here is free either way, and there is nothing to pay for as a student.
Create a free accountAlready have one? Sign in
Last updated