Income elasticity of demand

A measure of the relationship between a change in income and a change in quantity of a good demanded:

Income elasticity = % change in quantity demanded / % change in income.

Interpretations from the value of Income elasticity
If 0-1
Necessities, e.g. bread

If greater than 1
Luxury goods

If smaller than 0
Inferior goods, e.g. bus travel

Notes:

• During a period of increasing income, demand for luxury products tends to increase at a higher rate than the demand for necessities.
• Inferior goods has negative value of income elasticity while normal goods has positive one.