Income Elasticity of Demand Formulae

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Income Elasticity of Demand Formulae

A definition and the formula

With the price elasticity of demand, we were measuring the responsiveness of demand to a change in price.

With the cross price elasticity of demand, we were measuring the responsiveness of the demand for one good with respect to a change in price of another good.

With the price elasticity of supply, we were measuring the responsiveness of supply to a change in price.

With the income elasticity of demand, one measures the responsiveness of demand to a change in consumers' real income.

The following formula can be used to measure exactly how responsive demand is to a given change in income:

Price Elasticity of Demand Formulae

Where: EY = The income elasticity of demand
Δ = 'change in'
Qd = Quantity demanded
Y = Real income

Using the formula

The structure of this formula is exactly the same as for the other three elasticities. If you need a more detailed explanation of how to use this type of formula, go back to the Learn-It on 'the price elasticity of demand'. Otherwise, try these three questions. Once you have done them, click the appropriate button to get the answer and the required working. If you got one or more of the questions wrong, check the working carefully to make sure that you understand where you went wrong.

Average real incomes rise by 8% over a given year. As a result, the demand for cars rises by 24%. What is the income elasticity of demand (ceteris paribus)?
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Average real incomes rise by 5% over a given year. As a result, the demand for bus travel falls by 10%. What is the income elasticity of demand (ceteris paribus)?
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During a recession, average real incomes fall by 5% over a given year. The income elasticity of demand with respect to Brand X lageris +2.5. If initial sales of Brand X nationwide were 25 million litres, what will the new sales figure be as a result of the rise in income (ceteris paribus)?
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