# How to Calculate Income Elasticity of Demand

Income Elasticity of Demand Calculator
Initial Quantity
New Quantity
Initial Income\$
New Income\$

This income elasticity of demand (IED) calculator can be used to determine the income elasticity of demand. The income elasticity of demand measurement provides a useful indication of the correlation between demand for a given service or good and income changes.

### What is Income Elasticity of Demand?

Income elasticity of demand measures the extent to which a given good or service is sensitive to a change in income if all other factors remain constant. Income elasticity of demand can be computed by dividing percentage change in quantity by the percentage change in income. It represents a useful measure because it provides an insight into whether a given good or service is a luxury or a necessity.

You can compute income elasticity of demand using this simple calculator. Alternatively, if you wish to perform the calculation manually, you can use one of the formulas described below.

### Formula for Computing Income Elasticity of Demand

The formula employed to compute the income elasticity of demand is as follows:

IED = % Change in Demand(Quantity) / % Change in Income, or

IED = (Q1 – Q0) / (Q1 + Q0) / (I1 – I0) / (I1 + I0)

Where:

IED = income elasticity of demand,
Q0 = initial quantity,
Q1 = new quantity,
I0 = initial income,
I1 = new income.

Income of elasticity of can be categorised according to one of five types:

1. High: As income rises, demand for the product or service increases by a significant amount.
2. Unitary: As income rises, demand for the product or service increases by a proportionate amount.
3. Low: An increase in income is less than equivalent to the rise in the quantity of a product or service demanded.
4. Zero: The quantity bought/demanded remains the same regardless of any change in income.
5. Negative: As income rises, demand for the product or service decreases.

Example: At the start of a given period, the demand for an item is 500 units. This demand increases to 600 units by the end of the period. During this period, income has risen from \$3,000 to \$4,200.

The income elasticity of demand can be determined as follows:

Income Elasticity of Demand = (600 – 500)/(600 + 500)/(4200 – 3000)/(4200 + 3000)

Income Elasticity of Demand = 0.09/0.166 = 0.54

As such, the income elasticity of demand is 0.54. This indicates that the good of interest is a standard good that is income inelastic.