Income elasticity of demand or YED is referred to as the corresponding change in the demand of a product in response to the change in a consumer’s income. It can also be defined as the ratio of change in the quantity demanded by the change in the customer’s income.
A higher YED indicates that when the consumer’s income rises, there is a tendency to purchase more goods and services.
Similarly, when there is a drop in income, the consumer shows a tendency towards frugal purchasing, which involves cutting down on buying more quantity of goods and services.
When the YED is low, the change in consumer income has little effect on the demand for the product.
Income elasticity of demand is a useful measure used by governments and businesses to determine the type of goods to be produced and the impact of the changes in income on the demand of products of those businesses.
It can be used for predicting the economic growth of a country and the income of the individuals in a country.
The mathematical representation of income elasticity demand formula is as follows:
Income elasticity of demand (YED) = Percentage change in the quantity demanded/Percentage change in income
YED = % ∆ in Qd/% in ∆Y
Types of Income Elasticity of Demand
There are five types of income elasticity of demand, which are as follows:
- High: Increase in the consumer’s income leads to an increase in the quantity demanded for the product.
- Unitary: The rise in income is in alignment with the quantity demanded.
- Low: The rise in income is not much aligned with the demand for the quantity of the product.
- Zero: The rise in income does not change the demand for the products, or in other words, consumers demand the same quantity of products.
- Negative: The rise in the consumer’s income results in the decline of the quantity demanded for the product.
Also read: Elasticity of Demand
This concludes the discussion on the topic of Income Elasticity of Demand Formula, which indicates the impact of consumer income on the demand for the quantity of goods. To learn more such interesting concepts, stay connected to BYJU’S.