Definition
Income Elasticity of Demand
Income elasticity of demand measures how demand for a good changes as consumer incomes change, distinguishing normal goods, luxuries and inferior goods.
Normal goods see demand rise with income; luxuries rise faster than income (elasticity above 1); inferior goods (like cheaper staples or public transport) see demand fall as people grow richer.
In India's growth story, income elasticity explains the boom in discretionary spending, premium brands, two-wheelers upgrading to cars, and packaged foods as incomes rise. Investors use it to spot sectors that benefit most from rising household incomes.
Related terms
- Cross Elasticity of DemandCross elasticity of demand measures how the demand for one good changes when the price of another changes, identifying substitutes (positive) and complements (negative).
- Giffen and Veblen GoodsGiffen and Veblen goods are rare exceptions to the law of demand: people buy more of them when prices rise, for opposite reasons of poverty and prestige.
- Comparative AdvantageComparative advantage is the principle that countries gain by specialising in goods they produce at the lowest opportunity cost and trading for the rest, even if one is better at everything.
- Price Elasticity of DemandPrice elasticity of demand measures how sharply the quantity people buy responds to a change in price; elastic goods react strongly, inelastic ones barely react.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.