Income elasticity

Income elasticity measures how sensitive sales of a good are to changes in consumers' income. It is:


Q is the quantity demanded
Y is income, and
Δ has its usual meaning of indicating change

Income elasticity leads to the income effect, and the classification of goods as inferior or normal.

Income elasticities of greater than one have also been used to classify goods as luxuries rather than necessities. The reasoning behind the latter is that if people cannot reduce their consumption of a good in line with their incomes, then it must be (to them) a necessity. It should be pointed out that (like much similar economic theory) only the judgement of the consumer counts. Which is why, by this criterion, tobacco (or heroin for that matter) is a necessity: the correctness of this is beyond the scope of our discussion here.

Copyright Graeme Pietersz © 2005-2016