Calculator
Formula
Income Elasticity of Demand = % Change in Demand ÷ % Change in Income
% Change in Demand = (Demand End – Demand Start) ÷ Demand Start
% Change in Income = (Income End – Income Start) ÷ Income Start
How to Calculate Income Elasticity of Demand – Step by Step
- Find the percentage change in quantity demanded.
This shows how much more (or less) people are buying. - Find the percentage change in income.
This is how much someone’s income has gone up or down. - Divide the change in quantity by the change in income.
This tells you how sensitive demand is to income changes.
Example
Imagine someone earns $2,000 a month and buys 10 pizzas. When their income rises to $3,000, they buy 15 pizzas. Here’s how you calculate income elasticity:
- Find the percentage change in quantity:
% Change in Quantity = (15−10) ÷ 10 × 100% = 50% - Find the percentage change in income:
% Change in Income = (3000−2000) ÷ 2000 × 100% = 50% - Calculate income elasticity:
YED = 50% ÷ 50% = 1
Result: The income elasticity is 1, meaning demand for pizza grows at the same rate as income.
Definition – What is “income elasticity of demand”?
Income elasticity of demand is a way to measure how much people buy when their income changes. Think about it like this: If you get more allowance, do you buy more candy or save for a fancy toy? Some things we buy more of when we have more money, and others we might not buy at all if we earn less. Income elasticity helps figure out these changes.
For example, if someone earns more money and starts buying fancier meals instead of fast food, those fancy meals are “income elastic.” But if they earn less and still buy bread, that bread is “income inelastic” because people buy it no matter their income.
FAQs
Q: What does a positive income elasticity mean?
A: It means people buy more of the product when their income increases. An example would be jewelry. When people make more income, they buy more jewelry
Q: Can income elasticity be negative?
A: Yes, for “inferior goods,” where higher income makes people buy less.
Q: What does it mean if income elasticity is zero?
A: People buy the same amount no matter how their income changes.
Sources and more resources
- Wikipedia – Income Elasticity of Demand – Overview of the income elasticity of demand formula.
- Franny Chan – Macroeconomics – Income Elasticity of Demand – An explanation of the formula to calculate income elasticity of demand.
- Georgia State University – Econport – Income Elasticity – Explains the concept of income elasticity.
- OECD Glossary – Income Elasticity of Demand – The OECD’s glossary entry for Income Elasticity.
- Franny Chan Macroeconomics – Income Elasticity of Demand – A condensed explanation of Income Elasticity.
- Thayer Watkins – Income Elasticity of Demand (or What Happens to the Quantity Demanded of Goods When Income Changes?) – Formula summary of Income Elasticity of Demand.