INCOME ELASTICITY OF DEMAND 
Definition: Income elasticity of demand (Ey, here y stands for income) tells us the relationship a product's quantity demanded and income. It measures the sensitivity of quantity demand change of product X to a change in income. Price elasticity formula: Ey = percentage change in Quantity demanded / percentage change in Income If the percentage change is not given in a problem, it can be computed using the following formula: Percentage change in Qx = (Q1Q2) / [1/2 (Q1+Q2)] where Q1 = initial Qd, and Q2 = new Qd. Percentage change in Y = (Y1Y2) / [1/2 (Y1 + Y2)] where Y1 = initial Income, and Y2 = New income. Putting the two above equations together: Ey = {(Q1Q2) / [1/2 (Q1+Q2)] } / (Y1Y2) / [1/2 (Y1 + Y2)]
Characteristics: Ey > 1, Qd and income are directly related. This is a normal good and it is income elastic. 0< Ey<1, Qd and income are directly related. This is a normal good and it is income inelastic. Ey < 0, Qd and income are inversely related. This is an inferior good.
Example: If income increased by 10%, the quantity demanded of a product increases by 5 %. Then the coefficient for the income elasticity of demand for this product is:: Ey = percentage change in Qx / percentage change in Y = (5%) / (10%) = 0.5 > 0, indicating this is a normal good and it is income inelastic.
