The income elasticity of demand (YED) illustrates how the demand for a good will change for a given change in household income. This is useful when identifying the likely impacts on both consumers and producers.

If the YED has a value of +0.4, it can be interpreted as follows, a 1% increase in the household income will result in a 0.4% increase in the demand for the good. Alternatively, a YED value of -1.5 implies that a 1% increase in household income will result in a fall of 1.5% in the quantity demanded.

Interpreting the YED for consumers

The sign illustrates how consumers react to a change in their income conditions. For instance, if the YED has a positive sign, then this implies that the good is normal or luxury. So if household income increases then the demand for the good increases (D1 to D3).

However, if the YED is negative, then this implies that the good is inferior. Therefore, if the level of household income increases the demand for the good falls.

The size of the shift of the demand curve will depend on the value, large shifts are associated with an elastic YED (greater than 1), and smaller shifts are associated with an inelastic YED (less than 1).