Income Elasticity of Demand

Income Elasticity of Demand ($E_y$) measures the degree of responsiveness of quantity demanded of a commodity to a change in the CONSUMER'S INCOME, price and all other factors remaining constant.

Unlike price elasticity, income elasticity can be genuinely negative, and this sign is NOT ignored — it distinguishes different categories of goods:

• Positive income elasticity ($E_y > 0$) — quantity demanded rises as income rises. These are called Normal Goods. Within normal goods: if $E_y > 1$ the good is a Luxury (demand rises proportionately MORE than income — cars, branded appliances); if $0 < E_y < 1$ the good is a Necessity (demand rises, but proportionately LESS than income — food grain, basic clothing).
• Negative income elasticity ($E_y < 0$) — quantity demanded FALLS as income rises. These are called Inferior Goods — as consumers grow richer, they shift away from these towards better substitutes (e.g., a household buying less coarse grain and more rice/wheat as income rises).
• Zero income elasticity ($E_y = 0$) — quantity demanded does not change at all with income (certain bare necessities, such as salt, whose consumption is largely fixed regardless of income level). …