What are the types of income elasticity of demand?

Answer 1

Income elasticity of demand(EY):

Income elasticity of demand measures the relationship between a change in quantity demanded and a change in income. Income elasticity of demand measures the degree responsiveness or reaction of the demand for a good to a change in the income of the consumer. It is calculated as the ratio of the percentage change in demand to the percentage change in income. In other words, it is defined as the rate of percentage change in quantity demanded resulted from percentage change in consumer's income. For example, if, in response to a 10% increase in income, the demand for a good increased by 20%, the income elasticity of demand would be 20%/10% = 2.

Types of Income elasticity:

i. Zero Income Elasticity of Demand

Zero income elasticity of demand is that in which quantity demand for a commodity remains constant to any change in income of the consumer. The value of the zero income elasticity is zero. It can be found in case of neutral goods. Graphically it can be explained as

In the graph, quantity demand is measured in X-axis

and income is measured in Y-axis. DD is the demand

curve which is parallel to Y-axis implying that no

change in quantity demanded to any change in

consumer's income. Income is varying from Y1

to Y2 and Y2 but quantity demand remain the

same quantity at Q1.

ii. Positive Income Elasticity of Demand(EY>0)

Positive income elasticity of demand is that in which increase in consumer's income leads to increase in quantity demanded and vice-versa. The numerical value of positive income elasticity is always greater than zero which may be greater than(for luxurious goods) or equal (for normal goods)or less than(for necessity goods) unity i.e. 1. For example, when consumers become reach or increase their income then they spend more on luxurious goods. On the contrary, consumers purchase less quantity of luxurious goods if their income decrease or they become poor. It can be further explained with the help of following figure

In the given figure, DD is the demand curve which is positively

slopped. This demand curve implies, when consumers income

increases from Y1 to Y2 as in figure then consumer demanded

more quantity i.e. increases quantity from Q1 to Q2 according

to figure.

i. Negative Income Elasticity of Demand(EY<0)

Negative income elasticity of demand is that in which increase in consumer's income leads to decrease in quantity demanded and vice-versa. The numerical value of negative income elasticity is always less than zero. It can be found in case of inferior goods. Graphically it can be explained as

In the given figure, DD is the demand curve which is

negatively slopped. This demand curve implies, when

consumers income increases from Y1 to Y2 as in

figure then consumer demanded less quantity i.e.

decreases quantity from Q2 to Q1 according to figure.

Note:figure can not be attached

-Pavan Adhikari, M.A., economics,econometrics extra paper "T.U."

Kathmandu,Nepal

adhikaripavan@hotmail.com