Question

What is the formula for the income elasticity of demand?

Short answer

The formula for the income elasticity of demand (IED) is given by: \( IED = \frac{\% \text{ Change in Quantity Demanded}}{\% \text{ Change in Income}} \) or \( IED = \frac{(\Delta QD / QD)}{(\Delta Y / Y)} \) where IED represents the income elasticity of demand, \( \Delta QD\) is the change in quantity demanded, QD is the initial quantity demanded, \( \Delta Y\) is the change in income, and Y is the initial income.

Step-by-step solution

Definition of Income Elasticity of Demand

Income elasticity of demand is a measure of the responsiveness of the quantity demanded of a good to a change in income of the consumers who demand that good, ceteris paribus (all other factors held constant).

Formula for Income Elasticity of Demand

The formula for the income elasticity of demand (IED) is given by: \( IED = \frac{\% \text{ Change in Quantity Demanded}}{\% \text{ Change in Income}} \) or \( IED = \frac{(\Delta QD / QD)}{(\Delta Y / Y)} \) where: - IED is the income elasticity of demand - \( \Delta QD\) is the change in quantity demanded - QD is the initial quantity demanded - \( \Delta Y\) is the change in income - Y is the initial income Keep in mind that while calculating the percentage changes, it is important to use the average of the initial and final values as a base. Now you know the formula for the income elasticity of demand and how to apply it to compute the responsiveness of the quantity demanded for a good to a change in income.