Income Elasticity of Demand
Plain definition
Income elasticity of demand measures how quantity demanded responds to a change in consumer income: (percentage change in quantity demanded) divided by (percentage change in income). It classifies goods: positive values mean normal goods, negative values mean inferior goods.
In economics
Income elasticity explains consumption patterns as economies grow. Necessities (food staples) have small positive values; luxuries (foreign holidays) have large positive values; inferior goods (instant noodles for some households) have negative values. Firms use it to forecast how demand will move across the business cycle.
Example
When household incomes rise 10 percent and demand for restaurant meals rises 15 percent, income elasticity is +1.5 — a luxury-like normal good. If demand for bus travel falls 5 percent on the same income rise, income elasticity is -0.5 — bus travel is, for these riders, an inferior good.
The classic error is reading a negative income elasticity as inelastic. The sign here is about the type of good, not responsiveness: negative means inferior (quantity falls as income rises), positive means normal. Responsiveness is read from the magnitude — a -2.0 good is highly income-elastic, not inelastic.