Income Elasticity of Demand Calculator: Normal, Inferior or Luxury Good?
Find income elasticity of demand from incomes and quantities (midpoint or simple % change) or from % changes, classify the good and forecast demand.
How it works
Income elasticity (YED) = % change in quantity demanded ÷ % change in income · Midpoint: % change = (new − old) ÷ ((new + old) ÷ 2) · Simple: % change = (new − old) ÷ old
Income elasticity of demand measures how strongly the amount people buy responds when their income changes, with prices held constant. A positive value marks a normal good, a negative value an inferior good that people buy less of as they get richer. Among normal goods, a value between 0 and 1 is a necessity: demand rises with income, but more slowly, so its share of the budget shrinks. A value above 1 is a luxury, whose share of the budget grows as income rises. With two observations you can measure each percentage change two ways. The midpoint (arc) method divides each change by the average of the two values, so the answer is the same whether income rose or fell; textbooks and exam questions usually expect it. The simple method divides by the starting value, which is what quick estimates and many news reports use. The calculator shows both side by side, and a forecast line under More options applies your elasticity to another income change. This page is about income; the price elasticity calculator measures how demand reacts to the good’s own price instead, and the result here does not say anything about price sensitivity.
Worked example
A household’s income rises from $50,000 to $55,000, and the number of restaurant meals it buys per year goes from 200 to 230. With the midpoint method, the quantity change is 30 ÷ 215 = 13.953% and the income change is 5,000 ÷ 52,500 = 9.524%, so income elasticity = 13.953 ÷ 9.524 = 1.465. That is above 1, so restaurant meals behave like a luxury for this household and their share of its budget grows as income rises. The simple method gives 15% ÷ 10% = 1.500. If income rose another 10%, demand would rise by about 14.65%.
Sources: Pearson Channels: Income elasticity of demand (midpoint method, caviar example) · Wikipedia: Income elasticity of demand (classification, examples) · Omni Calculator: Income elasticity of demand (simple and midpoint methods) · Corporate Finance Institute: Income elasticity of demand
Frequently asked questions
What does a negative income elasticity mean?
It means people buy less of the good as their income rises, so it is an inferior good. Typical examples are the cheapest store brands, instant noodles and long-distance bus travel: as income rises, people switch to better alternatives.
What is the difference between a necessity and a luxury?
Both are normal goods (positive elasticity). A necessity has an elasticity between 0 and 1: demand grows more slowly than income, so it takes a smaller share of a richer household’s budget. A luxury has an elasticity above 1: demand grows faster than income and takes a larger share.
Should I use the midpoint or the simple method?
Use the midpoint (arc) method for homework and for comparing two observations, because it gives the same answer in both directions. The simple method, based on the starting value, is fine for small changes and for quick estimates. For small changes the two are almost identical.
How is income elasticity different from price elasticity?
Price elasticity measures how demand reacts to the good’s own price; income elasticity measures how it reacts to buyers’ income with prices unchanged. A good can be price-inelastic but income-elastic, such as a premium brand that loyal buyers keep buying when it gets dearer but that more people buy as they get richer.
How do businesses use income elasticity?
To forecast sales over the economic cycle. Sellers of luxuries (elasticity above 1) see sales swing more than incomes in booms and recessions, while sellers of necessities and inferior goods are more stable or even gain in downturns. Multiply your elasticity by a forecast income change to estimate the change in demand.
Related calculators
Elasticities estimated from two observations are rough; real demand also depends on prices, tastes and other factors.