What this calculator does
Income elasticity of demand measures how sensitive the quantity of a good someone buys is to a change in their income, rather than to a change in price. It answers a different question from price elasticity: not "what happens if this gets more expensive," but "what happens if I earn more."
The result is not just a size, its sign carries information too. A positive income elasticity of demand means people buy more of the good as income rises, which is what economists call a normal good. A negative value means people buy less of it as income rises, an inferior good, typically something bought mainly because a cheaper alternative was unaffordable.
The formula
Work out the percentage change in quantity demanded and the percentage change in income separately, then divide the first by the second. The result is a single number, with no unit, that describes the relationship between the two percentage changes rather than either one on its own.
| Term | Meaning |
|---|---|
| Income elasticity of demand | The formula: (%ΔQuantity demanded) ÷ (%ΔIncome). |
| Normal good | Income elasticity greater than zero: demand rises as income rises. |
| Inferior good | Income elasticity less than zero: demand falls as income rises. |
| Income elastic | Income elasticity greater than 1: demand grows faster than income, common for luxuries. |
The inputs explained
| Field | What to enter |
|---|---|
| Original income ($) | The income figure in the period or scenario being compared from. |
| New income ($) | The new income figure being compared to. |
| Original quantity demanded | The quantity demanded at the original income. |
| New quantity demanded | The quantity demanded at the new income. |
When to use it
Classifying a product as a luxury or a necessity
An income elasticity above 1 signals a luxury good, where spending on it grows faster than income. A positive value below 1 signals a necessity, where demand still rises with income but not as quickly.
Spotting an inferior good
Some goods see demand fall as people get richer and switch to better alternatives, such as budget staples losing ground to premium versions. A negative income elasticity is the signature of that pattern.
Forecasting demand through an economic cycle
A business that knows the income elasticity of its product can estimate how a forecast change in average household income, in a boom or a downturn, is likely to move the quantity it sells.
Worked examples
Every figure in the tables below is produced by this page’s own calculator at build time, so the numbers and the tool always agree. Select any row to load that scenario.
How income elasticity changes with the size of the demand response
The same 20% income rise, against a range of resulting changes in quantity demanded.
| New quantity demanded | Income elasticity of demand | % change in quantity demanded | Classification |
|---|---|---|---|
| 90 | -0.500 | -10.0% | Inferior good: quantity demanded falls as income rises |
| 95 | -0.250 | -5.00% | Inferior good: quantity demanded falls as income rises |
| 100 | 0.000 | 0.000% | Normal good, income inelastic: demand rises with income but less than proportionally |
| 110 | 0.500 | 10.0% | Normal good, income inelastic: demand rises with income but less than proportionally |
| 120 | 1.000 | 20.0% | Normal good, income elastic (often a luxury): demand rises more than proportionally with income |
| 140 | 2.000 | 40.0% | Normal good, income elastic (often a luxury): demand rises more than proportionally with income |
How income elasticity changes with the size of the income change
The same 15% rise in quantity demanded, against a range of income increases behind it.
| New income | Income elasticity of demand | % change in income |
|---|---|---|
| $52,500 | 3.000 | 5.00% |
| $55,000 | 1.500 | 10.0% |
| $57,500 | 1.000 | 15.0% |
| $60,000 | 0.750 | 20.0% |
| $65,000 | 0.500 | 30.0% |
| $70,000 | 0.375 | 40.0% |
Questions
How is income elasticity of demand different from price elasticity of demand?
Price elasticity of demand measures how quantity demanded responds to a change in price. Income elasticity of demand measures how quantity demanded responds to a change in income instead, with price held constant. The formulas have the same shape, %ΔQuantity divided by %Δ(the other variable), but that other variable is income here rather than price. See the price elasticity of demand calculator for the price version.
What does a negative income elasticity mean in practice?
It means demand for the good falls as income rises, which is the definition of an inferior good. Instant noodles and no-frills own-brand groceries are common textbook examples: people buy less of them once they can afford better alternatives.
What income elasticity counts as a luxury good?
Anything above 1. That means spending on the good grows proportionally faster than income itself, so it takes up a larger share of the household budget as people get richer, the defining trait of a luxury rather than a necessity.
Can income elasticity of demand change over time for the same product?
Yes. A product can behave as a luxury when it is new and expensive, then shift toward a necessity as prices fall and it becomes mainstream, or the reverse if a once-standard product is displaced by a newer alternative as incomes rise.
For the price-driven version of the same formula, see the price elasticity of demand calculator. To convert the raw before-and-after figures into a plain percentage change first, use the percentage increase calculator.