How to Calculate Income Elasticity of Demand
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 DemandThe 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)
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:
- High: As income rises, demand for the product or service increases by a significant amount.
- Unitary: As income rises, demand for the product or service increases by a proportionate amount.
- Low: An increase in income is less than equivalent to the rise in the quantity of a product or service demanded.
- Zero: The quantity bought/demanded remains the same regardless of any change in income.
- 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.
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