Home
Back
Income Elasticity Formula (Midpoint Method):
| From: | To: |
Income Elasticity of Demand (IED) measures how much the quantity demanded of a good responds to a change in consumers' income. It shows whether a good is a necessity or a luxury, and helps businesses predict sales changes based on economic conditions.
The calculator uses the midpoint formula:
Where:
Explanation: The midpoint method calculates percentage changes relative to the average of the initial and new values, which gives the same result regardless of which value is considered the starting point.
Positive IED (>0): Normal good (demand increases with income)
Negative IED (<0): Inferior good (demand decreases with income)
IED > 1: Luxury good (demand increases more than proportionally with income)
0 < IED ≤ 1: Necessity good (demand increases but less than proportionally with income)
Tips: Enter all values as positive numbers. For accurate results, use consistent units for quantities (e.g., all in thousands) and income (all in USD).
Q1: Why use the midpoint method instead of simple percentage change?
A: The midpoint method gives consistent results regardless of which value is considered the starting point, making it more reliable for elasticity calculations.
Q2: What's the difference between income elasticity and price elasticity?
A: Income elasticity measures response to income changes, while price elasticity measures response to price changes of the good itself.
Q3: Can IED values change over time?
A: Yes, as goods can shift between categories (luxury to necessity) as income levels and consumer preferences change.
Q4: What are some examples of goods with different IED values?
A: Basic food items (low IED), designer clothes (high IED), instant noodles (negative IED for higher income groups).
Q5: How is this used in business planning?
A: Businesses use IED to forecast demand changes during economic expansions/recessions and to segment markets by income levels.