Income Elasticity Of Demand SS2 Economics Lesson Note

Income elasticity of demand is the degree of responsiveness of quantity demanded of a commodity to a small change in consumers’ income. That is, it measures how changes in the income of consumers will affect the quantity of commodities demanded by such consumers.  

Mathematically, the income elasticity of demand is expressed as:

% change in Quantity Demanded

      % change in Income

When the percentage change in income brings about an equal change in the quantity demanded, then income elasticity is unit.

When the percentage change in income is greater than the percentage change in quantity demanded, income elasticity is less than the unit, hence income is inelastic.

When the percentage change in quantity demanded is greater than the percentage change in income, then income elasticity is greater than unit, hence income elasticity is elastic.

TYPES OF INCOME ELASTICITY OF DEMAND

1. Positive Income Elasticity of Demand: is the type of income elasticity of demand in which an increase in the income of the consumer will equally lead to an increase in the quantity of commodity demanded. This is applicable majorly to normal goods.
2. Negative Income Elasticity of Demand: is the type in which an increase in income of consumers will lead to a decrease in the quantity of commodity demanded. This applies to inferior goods.

Illustration: The table below shows the various income and demand for different commodities.

Income Quantity Demanded

       #                       Kg

1. 20,000                120
2. 36,000                 96
3. 40,000           160
4. 44,000           200
5. 45,000                240
6. 47,000                 252 
7. a) Calculate the income elasticity between (i) A and B  (ii) C and D  (iii) E and F
8. b) What kind of good relationship is between (i) A and B (ii) C and D

SOLUTION

Income Elasticity of Demand      

= % Change in Quantity Demanded

            % Change in Income

(a) Income Elasticity of Demand

i Between A and B

= 120 – 96 x 100

                     120                               = 0.25

36000 – 20,000 x 100

      20,000

ii Between C and D

200 – 160 x 100

                 160                                            = 2.5

          44000 – 40,000 x 100

      40,000

iii Between E and F

  252   –    240    x 100

          240

                                                                    = 1.125

47000 –  45000 x 100

    45000

(b)   i.    Giffen goods or inferior good

1.   Normal goods

It should be re-emphasized that positive income elasticity of demand is for normal’ or superior’ or luxury goods’, whereas Negative income elasticity of demand is for abnormal, or inferior goods.