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The Income elasticity of demand is the quantity demanded of a particular product depends not only on its own price (see elasticity of demand) and on the price of other related products (see cross price elasticity of demand), but also on other factors such as income. The purchases of certain commodities may be particularly sensitive to changes in nominal and real income.

The concept of income elasticity of demand therefore measures the percentage change in quantity demanded of a given product due to a percentage change in income. The measures of income elasticity of demand may be either positive or negative numbers and these have been used to classify products into "normal" or "inferior goods" or into "necessities" or "luxuries".

If as a result of an increase in income the quantity demanded of a particular product decreases, it would be classified as an "inferior" good. The opposite would be the case of a "normal" good. Margarine has in past studies been found to have a negative income elasticity of demand indicating that as family income increases, its consumption decreases possibly due to substitution of butter. This finding may, however, be less applicable today given health concerns regarding heart disease and cholesterol levels and new information on beneficial attributes of margarine. This illustrates the inherent risks likely to be associated with generalizations or classification of products based on income elasticity measures.

Source Publication:
Glossary of Industrial Organisation Economics and Competition Law, compiled by R. S. Khemani and D. M. Shapiro, commissioned by the Directorate for Financial, Fiscal and Enterprise Affairs, OECD, 1993.


Statistical Theme: Financial statistics

Created on Thursday, January 3, 2002

Last updated on Saturday, March 16, 2002