Income Elasticity of Demand Calculator

Income Elasticity of Demand Calculator: Frequently Asked Questions

How Do You Use the Income Elasticity of Demand Calculator

Simple - enter the following items:

• Original Income Level
• New Income Level
• Original Quantity Demand
• New Quantity Demand

And hit the calculate button. The tool will calculate the income elasticity of demand and evaluate the relationship between the two products.

How Do You Calculate Income Elasticity of Demand?

We use the midpoint formula to calculate income elasticity. This appears to be the version used by the more rigorous academic sources. Other version of the formula exist (simple comparison of percentage change in demand). Midpoint Income Elasticity Formula: ((Q1 - Q0) / (I1 - I0)) * ((I1+I0)/2)/(Q1+Q0)/2))

What does Positive Income Elasticity of Demand Mean?

We refer to products with positive income elasticity as "superior goods". This means that consumer demand for the product is expected to increase as the average income level in a market increases.

What does Negative Income Elasticity of Demand Mean?

We refer to products with negative income elasticity as "inferior goods". Consumers are willing to purchase them when their average income level is depressed but are more than willing to move to better products once their income improves.

What are Normal Goods?

Products that experience near constant demand across different levels of community income are referred to as "normal goods". These are frequently products which are either required for life, purchased infrequently (less awareness of price / quality relationship), or otherwise insulated for consumer preferences for consumption or status signalling.

What Can Cause Changes in Income Elasticity of Demand?

The income elasticity of a product can change over time, particularly within a particular market. Some specific items of note:

• Changes in Consumer Trends: Recycled products are an excellent example of this. Increased focus on "buying green" and supporting environmental causes has inverted their traditional place in the consumer products rankings. While these items have traditionally been viewed as a "value tier" choice for consumers, new brands are emerging that use the green story behind these brands to pursue a premium brand image among higher income consumers. Over time these product should start performing like superior goods, particularly products that are positioned to appeal to affluent environmentalists.
• Technology Change: Demand for technology products shifts downwards demographically as the product space matures. Innovative products typically launch as "superior goods" targeted at early adopters and affluent market segments and their role changes as the potential audience expands and the price points drop.
• Input Cost Shocks: Significant swings in input costs independent of average market income can reposition a product within this system. Producers must increase prices to stay solvent and this forces a shakeout within the market.

What Can You Do With Income Elasticity of Demand?

Income elasticity of demand is an important concept when doing strategic analysis of emerging economies and developing markets. As the average income level within a community changes, the mix of products demanded will change along with it. This can often create opportunities to build market share and invest in capital equipment ahead of future market demand. A good example of this is consumer packages goods and new retail formats within the emerging economies. As the average income levels in these markets increases, creating a growing middle class, forward thinking consumer goods companies are positioning businesses to serve them.

This concept also works for strategic planners in established economies who want to assess how demand will change across different phases of the business cycle or in operations serving disadvantaged communities. A strong portfolio of products should contain offering with a wide range of income elasticities: premium products for good times and budget offerings for an economic downturn. Similarly, understanding how product demand fluctuates with income level is key to correctly serving different communities and market segments.