• Income Elasticity of Demand (YED) measures the responsiveness of demand for a good or service to a change in income of consumers.
• YED is calculated as the percentage change in quantity demanded divided by the percentage change in income.
• YED can be positive, negative, or zero, indicating how changes in income affect demand.
• The formula for Income Elasticity of Demand is given below:
$\frac{\% \Delta Quantity Demanded}{\% \Delta Income} = \frac{\Delta Q}{\Delta I} \times \frac{I}{Q}$

#### Types of Income Elasticity of Demand:

1. Normal Goods: Goods that have a positive income elasticity of demand. As income increases, demand for these goods also increases. Examples include luxury goods like high-end cars, jewelry, and designer clothing.
2. Inferior Goods: Goods that have a negative income elasticity of demand. As income increases, demand for these goods decreases. Examples include lower-quality goods like generic brands and second-hand goods.
3. Necessities: Goods that have a zero or low-income elasticity of demand. As income increases, demand for these goods remains relatively constant. Examples include basic food items, healthcare, and housing.

#### Features of Income Elasticity of Demand:

1. YED can be positive, negative, or zero.
2. YED can be greater than 1, indicating a luxury good, or less than 1, indicating a necessity or inferior good.
3. YED can change over time as consumers’ income and preferences change.
4. YED can vary by country, region, or demographic group.
5. YED can be used to predict the impact of economic growth or recession on demand for different goods and services.

#### Importance of Income Elasticity of Demand to Business Managers:

1. YED helps managers understand how changes in consumers’ income affect demand for their products.
2. YED can be used to identify opportunities for growth and expansion in different markets.
3. YED can be used to determine pricing strategies for different goods and services.
4. YED can be used to forecast demand for different goods and services in the future.

#### Benefits of Income Elasticity of Demand:

1. YED provides managers with valuable information about consumer behaviour.
2. YED can help managers make informed decisions about product development, pricing, and marketing strategies.
3. YED can help managers identify new opportunities for growth and expansion.
4. YED can help managers make accurate demand forecasts.

#### Drawbacks of Income Elasticity of Demand:

1. YED is based on assumptions about consumer behaviour that may not always be accurate.
2. YED can be difficult to calculate accurately, especially for complex products and services.
3. YED may not reflect changes in consumer preferences or other factors that can affect demand.
4. YED does not provide information about the profitability of different goods and services, only the level of demand.