Income Elasticity of Demand
A measure of how much the quantity demanded of a good changes in response to a change in consumer income.
What is Income Elasticity?
Income elasticity of demand measures the responsiveness of quantity demanded to a change in consumer income, calculated as the percentage change in quantity demanded divided by the percentage change in income. Normal goods have positive income elasticity — demand rises as incomes increase. Inferior goods have negative income elasticity — consumers buy less as incomes rise, shifting to higher-quality substitutes. Luxury goods have income elasticity greater than 1, meaning demand grows faster than income. Necessities typically have elasticity between 0 and 1.
Example
Studies of consumer spending in the United States consistently show that demand for restaurant meals has an income elasticity above 1, making them a normal good with a luxury component. During the 2020 COVID recession, as household incomes fell, restaurant spending contracted sharply; when stimulus payments boosted incomes, restaurant visits rebounded quickly — a textbook illustration of high income elasticity.
Source: Bureau of Labor Statistics — Consumer Expenditure Survey