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