1. Income Elasticity
• The income elasticity of demand measures the
response of Qd to a change in consumer income.
Income elasticity Percent change in Qd
=
of demand Percent change in income
• It refers to the different quantities of
commodities or services which consumers
will buy at different levels of income, other
things remaining the same.
• It expresses the relationship between
income and quantity demanded.

2. Computing Income Elasticity
P e rc e n ta g e c h a n g e
in q u a n tity d e m a n d e d
In c o m e e la s tic ity o f d e m a n d =
P e rc e n ta g e c h a n g e
in in c o m e
Goods consumers regard as necessities tend
to be income inelastic. Examples include
food, fuel, clothing, utilities, and medical
services.
Goods consumers regard as luxuries tend to
be income elastic. Examples include sports
cars, furs, and expensive foods.

3. Types of Income elasticity
• Zero income elasticity
• Negative income elasticity
• Unitary income elasticity
• Income elasticity greater than one / High
elasticity
• Income elasticity less than one / Low
elasticity

4. Zero Income Elasticity
• This occurs when a change in income has NO effect on
the demand for goods.
P
D
Elasticity: 0
E1
E2
E raise Q
by 10% Q1
Q changes
by 0%
4

5. NEGATIVE INCOME ELASTICITY
• An increase in income will result in a decrease in
demand. Inferior goods have a negative
income elasticity of demand.
E
E2
E1
D
E rises Q
Elasticity: < 0 by 10% Q1 Q2
Q falls less
than 10%
5

6. Unitary income elasticity
• Increase in income and quantity
demanded are same.
E
E rises Q
Elasticity: by 10%
1
Q rises by 10%

7. Income elasticity > one.
• It is also called as High Elasticity.
• Consumer purchases goods in greater
proportion compared to increase in income.
• E= >1

8. Income elasticity < one.
• It is also called as Low Elasticity.
• Consumer purchases goods in lesser
proportion compared to increase in
income.

9. Income sensitivity of demand
• Measures the effects of income changes
on demand.
Necessaries will have a sensitivity co-
efficient less than 1, while those of
luxuries will be greater than one.
• Eis = % change in expenditure
% change in income

10. Cross elasticity of demand
• It is the ratio of proportionate change in
quantity demanded of A to a given
proportionate change in the price of
related commodity B.
• Ec = % change in demand for good A
% change in price good B

11. Types of Cross elasticity
• Positive elasticity:
For substitutes there exists a positive
elasticity between two goods.
• Negative elasticity:
For complementary goods there exists a
negative elasticity between two goods.
• Zero elasticity:
It exists for goods which are not related to
one another.

12. Nature of the demand curve for
cross elastic products
• For substitute goods which has positive
elasticity, the demand curve is upward
sloping.
• For complementary goods which has
negative elasticity, the demand curve is
downward sloping.
• For unrelated goods, demand curve is a
vertical straight line.