Income is an important factor that affects demand. Income elasticity of demand measures the responsiveness of quantity demanded to a change in income. When incomes change, the demand curve shifts. In some cases an increase in income might cause the demand curve to move to the right. This is an increase in demand. However, for some products, an increase in income causes a decrease in demand. In this case, the demand curve moves to the left.
A product’s income elasticity of demand tells us both the direction, and the magnitude, of a shift in demand caused by a 1% change in income. A numerical value for income elasticity of demand can be calculated using the following formula:
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