Income Elasticity: Normal and Inferior Goods

Income elasticity of demand is the percent change in quantity demanded divided by the percent change in income. The sign of the number tells you what kind of good you're looking at. If income goes up and people buy more, the elasticity is positive and the good is normal. If income goes up and people buy less of it, the elasticity is negative and the good is inferior. Instant noodles fit the inferior case: as a raise comes in, people replace cheap filler food with restaurant meals, so noodle purchases fall even though the person has more money to spend overall.

Once a good is normal, the size of the number still matters. A necessity, like toothpaste or basic groceries, has income elasticity between 0 and 1: spending rises with income but slower than income does. A luxury, like vacations or designer goods, has income elasticity above 1: spending rises faster than income. Both are normal goods, both have positive elasticity, but luxuries are far more sensitive to a paycheck changing.

This sits next to price elasticity as a second lens on the same demand curve: price elasticity asks how quantity reacts to price, income elasticity asks how quantity reacts to income, holding price fixed. Together they explain why a demand curve can shift outward with no price change at all. A boom in household income shifts demand for restaurant meals right and demand for instant noodles left, moving two different curves in opposite directions from the same cause.