1. What is Income Elasticity of Demand?

Income Elasticity of Demand (IED) measures how the quantity demanded of a good responds to a change in consumers' income. It is calculated as the percentage change in quantity demanded divided by the percentage change in income.

2. How Does the Calculator Work?

The calculator uses the IED formula:

Where:

• \( \frac{dQ}{dI} \) — Derivative of quantity with respect to income
• \( I \) — Income level
• \( Q \) — Quantity demanded at that income level

Explanation: This calculus-based approach provides the instantaneous elasticity at a specific point on the demand curve.

3. Importance of IED Calculation

Details: IED helps classify goods as normal (IED > 0), inferior (IED < 0), or luxury (IED > 1). It is crucial for businesses to understand how changes in consumer income affect demand for their products.

4. Using the Calculator

Tips: Enter the derivative dQ/dI, current income level, and current quantity demanded. All values must be valid (quantity cannot be zero).

5. Frequently Asked Questions (FAQ)

Q1: What does a positive IED indicate?
A: A positive IED indicates a normal good - demand increases as income increases.

Q2: What does a negative IED indicate?
A: A negative IED indicates an inferior good - demand decreases as income increases.

Q3: How is IED different from price elasticity?
A: IED measures sensitivity to income changes, while price elasticity measures sensitivity to price changes.

Q4: When is the calculus approach preferred?
A: The calculus approach provides precise point elasticity and is used when the demand function is known and differentiable.

Q5: What are limitations of this calculation?
A: This method assumes a continuous demand function and may not capture elasticity over larger income ranges accurately.