Interpreting Income Elasticity of Demand

We interpret income elasticity of demand in the same manner we did for price elasticity of demand. Above, the income elasticity of demand was calculated as 2.82. We interpret this calculation as follows: a one percent change in income results in a 2.82 percent change in quantity demanded in the same direction. The reason the change in quantity demanded is “in the same direction” as the change in income is that the calculated income elasticity of demand is positive. If the calculation resulted in a negative number, the interpretation would be “in the opposite direction.”

The Sign Matters With Income Elasticity of Demand You might have noticed that no mention was ever made about taking the absolute value of the income elasticity of demand. This is because the sign (positive or negative) matters with this calculation. A positive sign suggests that increases in income result in increases in quantity demanded. A negative sign would suggest that increases in income results in decreases in quantity demanded. Think back to the example of eating mostly lower-priced foods such as ramen noodles when incomes are lower. As incomes start to increase, consumers tend to stop purchasing as many lower-priced foods. This would be an example of a good that had a negative income elasticity of demand (the sign was negative). In economics, we refer to a good or service with a negative income elasticity of demand as an inferior good