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Definition: Income Elasticity
Demand of a consumer increases or decreases based on the consumer’s income. Income elasticity is basically the ratio of the percentage change in demand to the percentage change in the income of the consumer i.e. the responsiveness of the consumer to the increase or the decrease in the income,ceteris paribus. For example: If the increase in demand is 15% to an increase of 10 % in income ,the income elasticity is 1.5. If the increase in income leads to an increase in demand then the income elasticity is positive and vice-versa if the demand decreases with the increase in income. IF the increase in demand is proportional to the income, the income elasticity is unitary.
An increase in income does not always increase the quantity of demand of the goods. Goods are classified in to 4 different categories based on their responsiveness to demand.
The different types are:
Normal Goods: The demand of the goods increases with the increase in the income. For example: The increase in the buying of clothes with the increase in income. The income elasticity of demand is positive.
Necessary Goods: The goods whose demand increases in a smaller proportion to the increase in income. The demand for elasticity is less than 1 but greater than 0. The necessary good is a type of normal good. For example: Drinking water purifier. It is likely that the preference may change for some high end purifier but it is unlikely that the consumption will increase to a large extent
Inferior Goods: The demand of goods decreases with the increase in income. The consumer prefers other better substitutes of the good. The income elasticity of demand is negative. For example: cigarettes
Superior Good: Superior Good is a type of normal good. The proportional increase in demand is greater than the proportional increase in income. Superior Goods are also called luxury goods. For example : an increase in income may increase the demand for modular kitchen. Earlier, when the income was less there was no demand i.e. the demand=0. When the income increases , there is demand. So the increase in demand is proportionally greater than the increase in income
Sticky Goods: When the increase in income leads to no change in the demand of goods.