1. What is Income Elasticity of Demand?

Income Elasticity of Demand (IED) measures how much the quantity demanded of a good responds to a change in consumers' income. It shows the responsiveness of demand to income changes.

2. How Does the Calculator Work?

The calculator uses the income elasticity formula:

Where:

• \( \%\Delta Q \) — Percentage change in quantity demanded
• \( \%\Delta Income \) — Percentage change in income

Explanation: The formula calculates the ratio of the percentage change in quantity demanded to the percentage change in income.

3. Interpreting the Results

Details:

• IED > 1: Luxury good (demand changes more than income)
• 0 < IED ≤ 1: Normal good (demand changes less than income)
• IED < 0: Inferior good (demand decreases as income increases)

4. Using the Calculator

Tips: Enter initial and new values for both quantity demanded and income. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What does a high income elasticity mean?
A: A high IED (>1) indicates a luxury good where demand is very responsive to income changes.

Q2: Can income elasticity be negative?
A: Yes, negative IED indicates an inferior good where demand decreases as income rises.

Q3: How is this different from price elasticity?
A: Price elasticity measures response to price changes, while income elasticity measures response to income changes.

Q4: What are some examples of goods with different elasticities?
A: Luxury cars (high IED), basic food (low IED), instant noodles (negative IED).

Q5: Why is this important for businesses?
A: Helps predict demand changes during economic growth/recession and plan production accordingly.