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The income elasticity of demand is a measure of change in demand in response to a given change in the income of the buyers, here other factors including price remaining constant. It expresses the relationship between percentage change in income and percentage change in demand for the commodity.

Thus, Ey =

Normally, Demand for a commodity has tendency to increase as income increases. The income elasticity of demand (Ey) is positive. But this may not be so in case of inferior goods. The demand for 'inferior' goods diminishes as the income of the consumer rises because he turns to other goods which he considers to be superior. In such exceptional cases the income elasticity of demand may be negative.

We can identify income elasticity of demand with reference to the (a) nature of commodity and (b) values of income elasticity. Generally for normal goods Ey is positive and demand curve is upwards sloping from left to right. For inferior goods the demand curve has negative slope i.e. downward sloping. Income elasticity is negative for such goods.

Income elasticity can be more than one, less than one, equal to one or zero, depending upon the responsiveness of demand to change in income.

The concept of income elasticity is useful in identifying the product as luxury or necessity. It can also be used for planning production changes by the entrepreneurs. The Government may use the concept for executing various projects which would result in increases in supply of various commodities in future. Resources can be allocated better by using this concept in preparing projects reports. Thus, the concept of Income elasticity Plays an important role in economic theory.

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