Agricultural Economics Department

 

Date of this Version

February 2003

Comments

Published in Cornhusker Economics, 02/05/2003. Produced by the Cooperative Extension, Institute of Agriculture and Natural Resources, Department of Agricultural Economics, University of Nebraska–Lincoln.
http://www.agecon.unl.edu/Cornhuskereconomics.html

Abstract

The income elasticity of demand for a product measures the responsiveness of demand for the product to a change in disposable (after tax) income. To get the measure, one divides the percentage change in demand for the product by the percentage change in income. For example, if the demand for butter fell by 2 percent when incomes rose by 5 percent, the income elasticity of demand for butter is – 0.4 percent. If demand for butter went up by 5 percent, the income elasticity of demand would be 0.4. If instead it went up by 2 percent, the income elasticity of demand is 1. Most products have positive income elasticities of demand, meaning that as people become better off they buy more of it. Products that are consumed less as people become better off have negative income elasticities.

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