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Income Elasticity of Demand Calculator

LAST UPDATE: August 29th, 2018

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What is income elasticity of demand?

Income elasticity of demand is a measurement of how much demand for a good or service will increase if income increases.

A higher income elasticity of demand means that if incomes increase, demand for the good or service will greatly increase. If incomes fall, demand will significantly decrease. An example would be cars. When incomes go up, more people buy larger and fancier cars. When incomes go down, cars are less frequently bought.

A lower income elasticity of demand means that if incomes increase, demand for the good or service will slightly increase. If incomes fall, demand will slightly decrease.

A zero income elasticity of demand means that if incomes rise or fall, demand for the good or service will not change.

A negative income elasticity of demand means that if incomes increase, demand for the good or service will fall. If incomes fall,┬ádemand will increase. An example would be public transportation – when incomes go up, more people can afford their own transportation, and when incomes go down, more people take public transportation.

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

Example

Demand at the start of the period is 1,000 units and 2,000 units at the end of the period. In the same period, income increased from 4,000 to 5,000.

% Change in Demand = (2,000 – 1,000) / 1,000 = 1,000 / 1,000 = 1

% Change in Income = (5,000 – 4,000) / 4,000 = 1,000 / 4,000 = 0.25

Income Elasticity of Demand = 1 / 0.25 = 4

Therefore, income elasticity of demand is 4.

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