Income elasticity of demand

Income elasticity of demand can be used as an indicator of future consumption patterns and as a guide to firms' investment decisions.

For example, the "selected income elasticities" below suggest that as incomes increase over time, an increasing portion of consumers' budgets will be devoted to purchasing automobiles and restaurant meals and a smaller share to tobacco and margarine.

Estimates for income elasticities of demand for gasoline in developed economies range from 0.66 to 1.26.

[6] At low levels of per capita income, elasticities of demand for food, energy, or other products can be high.

For example, estimates of the income elasticity of cereals ranges from 0.62 in Tanzania to 0.47 in Georgia, 0.28 in Slovenia, and 0.05 in the United States.

At low levels of income, demand for energy or other goods increases very rapidly.

In addition, consumption patterns shift toward services rather than goods, which require fewer commodities to produce.

Inferior goods ' demand Q X falls as consumer income I increases.
Engels curves showing income elasticity of demand (YED) of normal goods (comprising luxury (red) and necessity goods (yellow)), perfectly inelastic (green) and inferior goods (blue)