Normal Versus Inferior Goods

income elasticity

Responsiveness of demand to changes in income, holding constant the effect of all other variables

inferior goods

Products for which consumer demand declines as income rises

The income elasticity of demand measures the responsiveness of demand to changes in income, holding constant the effect of all other variables that influence demand. Letting I represent income, income point elasticity is defined as

= Percentage Change in Quantity (Q) 1 Percentage Change in Income (I)

Income and the quantity purchased typically move in the same direction; that is, income and sales are directly rather than inversely related. Therefore, AQ/AI and hence eI are positive. This does not hold for a limited number of products termed inferior goods. Individual consumer demand for such products as beans and potatoes, for example, is sometimes thought to decline as income increases, because consumers replace them with more desirable alternatives. More normal goods

Products for which demand is positively related to income typical products, whose individual and aggregate demand is positively related to income, are defined as normal goods.

To examine income elasticity over a range of incomes rather than at a single level, the arc elasticity relation is employed:

Percentage Change in Quantity (Q) Percentage Change in Income (I)

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