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Income elasticity of demand

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Income elasticity of demand

The income of a consumer is the most influencing factor of demand for a good. Demand for goods responses to the change in the income of the buyer. The measure of the responsiveness of a quantity demanded of a product to the change in the income of the buyer, other things being constant is known as income elasticity of demand. The value of it may be positive, negative or zero depending on the nature of the commodity. Income elasticity is usually symbolized by EY. It can be expressed as:
income-elasticity-of-demand-formula


Where
∆Q=change in quantity demanded
∆Y=change in income
Y=Initial income
Q=initial quantity demanded

Degrees/Types of income elasticity of demand

There are three types of income elasticity of demand. They are as follows:-

1. Zero income elasticity of demand(EY=0)

If the quantity demanded for a commodity is totally irresponsive to the change in income of consumer, then the demand is known as zero income elasticity of demand. There is no relationship between the change in income and demand.
zero-income-elasticity-of-demand

In the above figure, income and quantity are shown along y-axis and x-axis respectively. When income increases from I to I1 or decreases from I to IO, the quantity demanded remains constant I.e. OQ. DD is demand curve which shows zero elasticity I.e. EY= O.

2. Positive income elasticity of demand (EY>0)

When quantity demanded increases with the increase in consumer’s income and decreases with a decrease in consumer’s income, then it is the case of Positive income elasticity of demand. Here the value of elasticity of demand remains greater than 0.
Positive_income_elasticity_demand

In the above figure income and quantity are shown along y-axis and x-axis respectively. When income increases from Y to Y1, the quantity demanded increases from Q1 to Q2. DD is the demand curve which is positively elastic in nature.I .e EY > 0

3. Negative income elasticity of demand (EY<0)

When demand for any commodity decreases with the increase in consumer’s income and vice versa.Then it is the case of negative income elasticity of demand. Here the value of elasticity of demand remains less than 0.
negative-income-elasticity-of-demand

In the above figure, income and quantity are shown along y-axis and x-axis respectively. When income decreases from I to I0, the quantity demanded increases from Q to Q1. DD is the demand curve which is negatively elastic in nature. I.e. EY < 0

Income elasticity of demand can also be presented in the following combined diagram:
income-elasticity-of-demand

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