Income Elasticity of Demand

Tax Glossary Definition

Income Elasticity of Demand

Income elasticity of demand measures how the demand for a good changes with consumer income. For normal goods, demand increases with income and decreases with income decreases. Higher income elasticity indicates greater demand changes with income changes.

Example 1: Normal Good (Luxury Item)

  • Consumer income rises by 10%.

  • Demand for high-end smartphones rises by 20%.

YED=20%=2YED = \frac{20\%}{10\%} = 2

  • Interpretation: Demand is highly income elastic, typical for luxury goods.

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