How is income elasticity of demand calculated?

The income elasticity of demand is calculated by dividing the percentage change in quantity demanded by the percentage change in income. The formula for calculating income elasticity of demand is as follows:

Income Elasticity of Demand = (Percentage Change in Quantity Demanded) / (Percentage Change in Income)

To calculate the percentage change in quantity demanded, you subtract the initial quantity demanded from the final quantity demanded, divide it by the initial quantity demanded, and then multiply by 100. Similarly, to calculate the percentage change in income, you subtract the initial income from the final income, divide it by the initial income, and then multiply by 100.

Once you have the percentage changes, you can substitute them into the formula to calculate the income elasticity of demand. The resulting value will indicate whether the good is income elastic, income inelastic, or income unitary.

If the income elasticity of demand is greater than 1, it indicates that the good is income elastic, meaning that the quantity demanded is highly responsive to changes in income. If the income elasticity of demand is less than 1, it indicates that the good is income inelastic, meaning that the quantity demanded is not very responsive to changes in income. Finally, if the income elasticity of demand is equal to 1, it indicates that the good is income unitary, meaning that the quantity demanded changes proportionally with changes in income.