Income Elasticity of Demand: 

The Income Elasticity of Demand refers to the rate of response of quantity demanded due to an increase (or fall) in a consumer's income. The formula for the Income Elasticity of Demand (IEoD) is given by:

IEoD = (percentage change in Quantity demanded)/percentage change in Income)

Unlike price elasticity of demand, the negative values are also to be taken into consideration. Income elasticity of demand is used to see how sensitive the demand for a good is to an income change. The higher the income elasticity, the more sensitive demand for a good is to income changes. A very high income elasticity suggests that when a consumer's income goes up, consumers will buy a great deal more of that good. A very low price elasticity implies just the opposite, that changes in a consumer's income have little influence on demand.

• If the income elasticity of demand is greater than 1( IEoD > 1), then the good is a Luxury Good and Income Elastic
• If the income elasticity of demand is greater than zero and less than one (IEoD < 1 and IEOD > 0) then the good is a Normal Good and Income Inelastic.
• If the income elasticity of demand is less than zero, (IEoD < 0)then the good is an Inferior Good and Negative Income Inelastic

Normal goods have a positive income elasticity of demand so as consumer's income rises, so more is demanded at each price level i.e. there is an outward shift of the demand curve. Normal necessities have an income elasticity of demand of between 0 and +1 while luxuries have an income elasticity of demand > +1, that is, the demand rises more than proportionate to a change in income. Demand is highly sensitive to (increases or decreases in) income. On the other hand, inferior goods have a negative income elasticity of demand because demand falls as income rises.