Income elasticity of demand

MEANING

Income elasticity of demand (Ey) expresses the responsiveness of a consumer's demand for any good to the change in his income.

It may be defined as the ratio of percentage change in the quantity demanded of a commodity to the percentage change in income.

In the words of Lipsey," The responsiveness of demand for a product to changes in income is termed income elasticity of demand."

Thus,
          Ey= Percentage change in the quantity demanded / Percentage change in income
                = ΔQ/ΔY x Y/Q
         
          where, ∆= change 
                    Q= quantity demanded
                     Y= income

 The coefficient Ey may be POSITIVE , NEGATIVE or ZERO depending upon the nature of a commodity.
If an increase in income leads to an increased demand for a commodity, then Ey is POSITIVE. This happens mainly in NORMAL GOODS.
If an increase in income leads to a fall in the demand for a commodity, then Ey is NEGATIVE. This happens mainly in INFERIOR GOODS.
If the quantity of a commodity purchased remains unchanged regardless of change in income, the Ey is ZERO. This happens mainly in NECESSITIES.

Normal goods are of three types:- NECESSITIES, LUXURIES AND COMFORTS.
In case of LUXURIES, Ey is POSITIVE but HIGH, Ey>1. Income elasticity of demand is high when the demand for a commodity rises more than proportionate to the increase in income.
Assuming income of consumer increase by 5% and as a result his demand for a commodity increase by 10%., Then,
                                           Ey= 10%/5%=2>1.
This is illustrated in the figure below where income is taken in the vertical axis and quantity demanded in horizontal axis. The increase in demand Q1Q2 is more than rise in income Y1Y2. The curve Dy shows a POSITIVE and ELASTIC INCOME DEMAND.

***Draw diagram

In case of NECESSITIES, Ey is POSITIVE but LOW, Ey<1. Income elasticity of demand is low when the demand for a commodity rises less than proportionate to the rise in the income. If the demand of a commodity increase by 2% when income increase is 5%, then
                                       Ey= 2%/5%=0.4<1.
This is illustrated in the figure below where the increase in demand Q1Q2 is less than proportionate to the rise in income Y1Y2. The curve Dy shows a POSITIVE and ELASTIC income demand.
****Draw diagram

In case of COMFORTS, Ey=1. When the demand for a commodity rises in the same proportion as the increase in income. For example a 5% increase in income leads to 5% rise in demand, then 
                              Ey= 5%/5%=1=1
This is illustrated in the figure below. The increase in quantity demanded Q1Q2 exactly equals the increase in income Y1Y2. The curve Dy shows UNITY INCOME ELASTICITY OF DEMAND.
****Draw diagram

In case of INFERIOR GOODS, Ey is NEGATIVE. The consumer reduces his demand when his income increase. If a 5% increase in income leads to 2% reduction in demand,then 
                        Ey= -2/5= -0.4<0.
This is illustrated in the figure below. Dy curve bends upwards from A to B when the quantity demanded decreases by Q2Q1 with the rise in income by Y1Y2.
*** Draw diagram

If with increase in income, the quantity demanded remains unchanged,then Ey=0. If, say, with 5% increase in income, there is no change in the quantity demanded,then
                           Ey= 0/5=0.
This is illustrated in the figure below. Dy is a vertical income demand curve with zero elasticity.
**Draw diagram

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