Income elasticity of demand

In economics, the income elasticity of demand (YED) is the responsivenesses of the quantity demanded for a good to a change in consumer income. It is measured as the ratio of the percentage change in quantity demanded to the percentage change in income. For example, if in response to a 10% increase in income, quantity demanded for a good or service were to increase by 20%, the income elasticity of demand would be 20%/10% = 2.0.

The point elasticity version, which defines it as an instantaneous rate of change of quantity demanded as income changes, is as follows. For a given Marshallian demand function ${\displaystyle Q(I,{\vec {P}}),}$ with arguments income and a vector of prices of various goods,

This can be rewritten in the form

For discrete changes the elasticity is (using the arc elasticity)

where subscripts 1 and 2 refer to values before and after the change.

The most commonly used elasticity in economics, the price elasticity of demand, is almost always negative, but many goods have positive income elasticities, many have negative.

Income elasticity of demand can be used as an indicator of future consumption patterns. For example, the "selected income elasticities" below suggest that as incomes increase over time, an increasing portion of consumers' budgets will be devoted to purchasing automobiles and restaurant meals and a smaller share to tobacco and margarine.

Income elasticities of demand for gasoline and diesel have been studied extensively, however, elasticities vary widely between studies. Estimates for income elasticities of demand for gasoline in developed economies range from 0.66 to 1.26.