What is income elasticity of demand? [2]

Income elasticity of demand (YED) measures the responsiveness of the quantity demanded of a good to a change in the consumer's income. It is calculated as the percentage change in quantity demanded divided by the percentage change in income.

Mathematically, it is expressed as:

$$\text{Income Elasticity of Demand (YED)}=\frac{\%\text{ Change in Quantity Demanded}}{\%\text{ Change in Income}}$$

Classification:

• YED > 1: Normal good (Luxury goods)
• 0 < YED < 1: Normal good (Necessities)
• YED < 0: Inferior good

Formula:

$$\text{YED}=\frac{\%\Delta Q_d}{\%\Delta Y}$$

Where:

• $\%\Delta Q_d$ = Percentage change in quantity demanded
• $\%\Delta Y$ = Percentage change in income

This elasticity helps determine whether a good is a necessity, luxury, or inferior based on income changes.