Income Elasticity
Income elasticity (of demand) is the percentage change in demand if income changes one percent:
Here, em is income elasticity, and m and Δm are income and change in income, respectively. Similarly to price elasticity, goods are grouped depending on their income elasticity:
A normal good (0 < em) is a good one buys more of if income increases. An inferior good (em < 0) is a good one buys less of when income increases. These goods are typically of low quality, and one decreases one’s consumption of them as one can afford better quality. Normal goods are further divided into necessary goods and luxury goods. If income increases with one percent, one buys less than one percent more of a necessary good, but more than one percent more of a luxury good.
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