Since cars have positive income elasticity of demand they are normal goods also called superior goods while buses have negative income elasticity of demand which indicates they are inferior goods. Income elasticity of demand change in quantity demanded change in income in an economic recession for example u s.
In this case the income elasticity of demand is calculated as 12 7 or about 1 7.
Income elasticity of demand formula. The measure or coefficient e i of income elasticity of demand can be obtained by means of the following formula. You can use the income elasticity of demand formula to measure how a change in quantity demanded for a certain product or service can affect a change in the consumer s income and vice versa. Income elasticity of demand is calculated using the formula given below income elasticity of demand d1 d0 d1 d0 i1 i0 i1 i0 income elasticity of demand 2 500 4 000 2 500 4 000 125 75 125 75 income elasticity of demand 0 92.
Income elasticity of demand of buses 35 29 50 0 71. η is the general symbol used for elasticity and the subscript i represents income. You can express the income elasticity of demand mathematically as follows.
Income elasticity of demand yed change in quantity demanded change in income the higher the income elasticity of demand for a specific product the more responsive it becomes the change in consumers income. In the formula the symbol q 0 represents the initial demand or quantity purchased that exists when income equals i 0. Income elasticity of demand of cars 28 57 50 0 57.
Income elasticity of demand q1 q0 q1 q2 i1 i0 i1 i2 the symbol q0 in the above formula depicts the initial quantity that is demanded which exists when the initial income equals to i0. The formula used to calculate the income elasticity of demand is the symbol η i represents the income elasticity of demand. Income elasticity of demand percentage change in quantity demanded δq percentage change in consumers real income δi or.
The formula is as follows. 2 11 for example suppose that the index of the buyers income for good increases from 150 to 165 and consequently the quantity demanded of the good per period increases from 300 units to 360 units. Household income might drop by 7 percent but the household money spent on eating out might drop by 12 percent.