The income elasticity of demand is the percentage change in

• A. income divided by the percentage change in price.
• B. the quantity demanded divided by the percentage change in income.
• C. the price divided by the percentage change in income.
• D. income divided by the percentage change in quantity demanded.

Answer: (B)

The income elasticity of demand measures how strongly quantity demanded responds to changes in income. It is defined as the percentage change in quantity demanded divided by the percentage change in income. This ratio shows how many percent the quantity demanded changes for each percent that income changes. For example, if income rises 10% and quantity demanded rises 6%, the elasticity is 0.6, indicating a moderate positive response. A positive elasticity means the good is normal, while a negative elasticity would indicate an inferior good. The key idea is comparing the percent change in quantity demanded to the percent change in income, not to price or to the level of quantity itself.