Income elasticity of demand (IED) refers to the sensitivity of the quantity demanded for a certain good to a change in real income of consumers who buy this good, keeping all other things constant.
Knowledge of IED helps firms predict the effect of an economic cycle on sales.
Formula to calculate income elasticity of demand.
Example:
Suppose the percentage change in quantity demanded was 20% and the percentage change in consumers income was 50%. Calculate the income elasticity of demanded.
Therefore, the IED is 0.4.
Since we got a positive but less than 1 IED, this indicates that these are normal goods.
