How is income elasticity of demand calculated?

The income elasticity of demand is calculated by taking the percentage change in quantity demanded and dividing it by the percentage change in income. This measure provides insight into how sensitive the quantity demanded of a good or service is to changes in consumers' income levels.

When income elasticity is calculated, it helps determine whether a good is a normal good or an inferior good. A positive income elasticity indicates that as income rises, demand for the good also increases, characteristic of normal goods. Conversely, a negative income elasticity would suggest that demand decreases as income rises, identifying those goods as inferior.

The focus on the relationship between quantity demanded and income makes this measure crucial for understanding consumer behavior in response to economic changes. In practice, economists and businesses utilize income elasticity to make predictions about market trends and to strategize accordingly.