Income Elasticity of Demand

INCOME ELASTICITY

Income Elasticity of Demand is the response of the change in quantity of demand when there is a change in income. The formula for measuring the income elasticity of demand is the percentage change in demand divided by the percentage change in income.

Or

(% change in demand)/(% change in income)

Now, this topic may appear in the test, maybe multiple choice tests, maybe written answer tests, maybe on “How to make gold in WoW”, yes I have seen many economic terms in gold making guides. For those want to make any type of money, in anyway, you must master the ways of economics!

Ok, but seriously, a question that will most likely appear on the test, would be something cheesy and annoying like: “Given the following data/chart, calculate the Income Elasticity of Demand of the good when the change from X income to Y income.”

Look for the table and find the data for X and for Y. the chart should give the incomes corresponding to the demand of the good. Look for the X income and demand along with the Y income and demand.

First, we find the percentage (%) change in the demand from Y demand take away by the X demand and the total divided by X demand. (Y demand - X demand)/X demand.

Not so fast! We're only halfway there! We now must find the percentage (%) change in the quantity, this similar to the formula above, we use the formula:

Y quantity take away by the X quantity and the total divided by X quantity.

(Y quantity - X quantity)/X quantity.

REMEMBER
X is OLD income and Y is NEW income!

REMEMBER
Then you use the new numbers and use the Income Elasticity of Demand formula! For those who have a short term memory, like me, the formula is...
(% change in demand) /(% change in income). Using the new values, input them into the formula and you'll get your answers!

HOORAY! You’ve passed all the math part! Now for the easy part, if the answer is in the chart below:

If IEoD is >1, the good is a Luxury Good or Income Elastic
If IEoD is 0>1, the good is a Normal Good or Income Inelastic
If IEoD is >0, the good is an Inferior Good or Negative Income Inelastic


Now, tests will usually come with a follow-up question, "Is the product a luxury, normal or inferior good from the range X-Y incomes?"

Then you write the answer depending on the chart above, corresponding to the answer you got after applying the numbers to the Income Elasticity of Demand formula.