Demand for a good depends upon a number of factors such as the price of that goods, the income of the consumer, prices of goods, etc. thus changes in any one of these factors may cause a change in the demand for that good. Other things being equal, if price changes, the quantity demanded of that goods will change. A rise in price may decrease the quantity demand while a fall in price may increase it. But the change in quantity demanded will be different in case of different goods. The price – elasticity of demand measure the responsiveness of demand, i.e. the degree or the extent of change in demand to a given change in price.
Income elasticity of demand of demand, on the other hand, measures the degree of change in the demand for a good in response to a given change in the income of the consumers. A rise in income may raise the demand for a good (if good is not inferior), and a fall in income may reduce its demand. But the degree of change will not be the same in case of all the goods. Hence, the responsiveness of demand to changes in income may vary from one good to another. This degree or extent of change in the demand for a good due to a given change in income is called income – elasticity of demand.
The term income elasticity of demand is used to estimate the degree of change in demand for a commodity with a given change in the income of the consumer. Thus, income elasticity of demand or
Ey = Proportion change in quantity demanded / Proportionate change in income
The coefficient of income elasticity where, ∆Q = change in quantity demanded
EY = ∆Q /Q ÷ ∆Y/Y = ∆Q/Q x Y/∆Y Q = original quantity
Or, EY = ∆Q /∆Y. Y/Q. ∆Y = change in income
Y = original income level