what is income elasticity of demand 
income elasticity of demand refers to the sensitivity of the quantity demanded for a certain good to a change in the real income of consumers who buy this good the formula for calculating income elasticity of demand is the percent change in quantity demanded divided by the percent change in income with income elasticity of demand you can tell if a particular good represents a necessity or a luxury investopedia paige mclaughlinunderstanding income elasticity of demandincome elasticity of demand measures the responsiveness of demand for a particular good to changes in consumer income the higher the income elasticity of demand for a particular good the more demand for that good is tied to fluctuations in consumers income businesses typically evaluate the income elasticity of demand for their products to help predict the impact of a business cycle on product sales depending on the values of the income elasticity of demand goods can be broadly categorized as inferior and normal goods normal goods have a positive income elasticity of demand as incomes rise more goods are demanded at each price level normal goods whose income elasticity of demand is between zero and one are typically referred to as necessity goods which are products and services that consumers will buy regardless of changes in their income levels examples of necessity goods and services include tobacco products haircuts water and electricity as income rises the proportion of total consumer expenditures on necessity goods typically declines inferior goods have a negative income elasticity of demand as consumers income rises they buy fewer inferior goods a typical example of such a type of product is margarine which is much cheaper than butter furthermore luxury goods are a type of normal good associated with income elasticities of demand greater than one consumers will buy proportionately more of a particular good compared to a percentage change in their income consumer discretionary products such as premium cars boats and jewelry represent luxury products that tend to be very sensitive to changes in consumer income when a business cycle turns downward demand for consumer discretionary goods tends to drop as workers become unemployed formula for income elasticity of demandthe formula for income elasticity of demand is example of income elasticity of demandconsider a local car dealership that gathers data on changes in demand and consumer income for its cars for a particular year when the average real income of its customers falls from 50 000 to 40 000 the demand for its cars plummets from 10 000 to 5 000 units sold all other things unchanged the income elasticity of demand is calculated by taking a negative 50 change in demand and dividing it by a 20 change in real income this produces an elasticity of 2 5 which indicates local customers are particularly sensitive to changes in their income when it comes to buying cars types of income elasticity of demandthere are five types of income elasticity of demand 