Types of Income Elasticity of Demand
The income elasticity of demand shows the responsiveness of quantity demanded of a certain commodity to the change in income of the consumer. The income elasticity of demand is also defined as ‘ the ratio of the percentage change in the demand for a commodity to the percentage change in income’.
There are five types of income elasticity of demand as follows:
Income elasticity greater than unity (ey > 1)
The income elasticity of demand is greater than the unity when the demand for a commodity increases more than percentage rise in income. For example, if the income increases by 50% and demand rises by 100%. In such a case, the numerical value of income elasticity of demand would be more than one (ey>1).
Income elasticity less than unity(ey < 1)
Income elasticity of demand is less than the unity when the demand for a commodity increases less than proportionate to the rise in income. Implies that positive income elasticity of demand would be less than unitary when the proportionate change in, the quantity demanded is less than proportionate change in income.
Income elasticity equal to unity (ey = 1)
Income elasticity is unity when the demand for a commodity increases in the same proportion as the rise in income. For example, if income increases by 50% and demand also rises by 50%, then the demand would be called as unitary income elasticity of demand. In such a case, the numerical value of income elasticity of demand is equal to one (ey = 1).
Zero income elasticity (ey = 0)
If the rise in income, the quantity demanded remains unchanged, the income elasticity is called zero income elasticity. Refers to the income elasticity of demand whose numerical value is zero. This is because there is no effect of increase in consumer’s income on the demand of product. The income elasticity of demand is zero (ey = 0) in case of essential goods. For example, salt is demanded in same quantity by a high income and a low income individual.
Negative income elasticity (ey < 0 >)
In the case of inferior goods, the income elasticity of demand is negative. The consumer will reduce his purchase of it when income rises and vice versa. For example, if the income of a consumer increases, he would prefer to purchase wheat instead of millet. In such a case, the millet would be inferior to wheat for the customer.