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 derived from graph analysis:

Where:

• \( Slope \) — Slope from the demand-income graph
• \( I \) — Income level
• \( Q \) — Quantity demanded at that income level

Explanation: This formula calculates the income elasticity at a specific point on the demand curve using the slope of the curve and the income-quantity ratio.

3. Importance of IED Calculation

Details: Income elasticity helps classify goods as normal goods (IED > 0), inferior goods (IED < 0), or luxury goods (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 slope from your demand-income graph, current income level, and corresponding quantity demanded. Ensure all values are valid (quantity > 0).

5. Frequently Asked Questions (FAQ)

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

Q2: What does a negative IED value 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 response to income changes, while price elasticity measures response to price changes.

Q4: What is the range of possible IED values?
A: IED can range from negative infinity to positive infinity, though most values fall between -3 and +3 in practical applications.

Q5: When is this formula most accurate?
A: This point elasticity formula is most accurate for small changes in income around the measured point.