Income Elasticity of Demand

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Income Elasticity of Demand

A measure of whether a good is considered a necessity or a luxury. It is measured as a ratio of the change in demand for a good to the change in consumer income. Demand for a necessity tends to change slowly with changes in income; that is, as consumers become wealthier, they do not necessarily buy more of a necessity because they already have all they need. On the other hand, demand for luxury increases quickly with increases in income, as consumers buy more of a luxury when they become wealthier.
References in periodicals archive ?
In particular, as expected and frequently reported in the literature, income elasticity is positive and equal to 8.7% (see Table 1).
By dividing total expenditures and all explanatory variables by such an index, it became possible to extract separate quality and quantity components of the income elasticity measures.
We hypothesize that the aggregated income elasticity of health expenditures in middle-income countries would be less than one (meaning healthcare is a normal good), supporting findings from the previous literature, but would still be larger than that of high-income countries.
An ordinary least-squares regression of the logarithm of disaster risk against the logarithm of gross domestic product (GDP) resulted in an income elasticity estimate of -1.21, significant at a t-statistic of 18.36.
Varying the income elasticity from 0.7 (i.e., significant dampening of demand from income effects) to 0 (i.e., no dampening of demand) shifts median spending in 2035 from 13 to 15 percent of income and spending at the 90th percentile from 47 to 52 percent of income.
Differences in the income elasticity of demand for the products that serve the different needs should express this differential satiation effect.
Table 2 reports that the long-run demand price elasticity of cigarette consumption in Peru was -0.689 (P = 0.06), while the long-run income elasticity of cigarette consumption was 0.658 (P = 0.06).
Goldstein and Khan (1978) find exports of seven developed countries out of total eight are more elastic to change as compared to the income of rest of the world, whereas, income elasticity of exports demand for US is found to be less than unity.
Income Elasticity of Expenditure in the Data and the Model
Most studies using aggregate lottery-demand models have estimated an income elasticity of demand that is less than one (and conclude that lotteries are regressive), whereas evidence on the cross-price elasticity of demand is mixed.
If income elasticity is (positive and) not greater than one, that is, insurance is a normal good, then from a macroeconomic viewpoint, its share in the total economy shrinks--or at most remains unchanged--along with economic development.