Measurement of Income Elasticity of Demand from

Point Method on a linear demand curve

Income elasticity of demand is the ratio of percentage change in demand for a
commodity with the change in income level of the consumer. It can be written as :
Income elasticity of demand (EY) =
∆𝐐
∆𝐘
×
𝐘
𝐐
Y D

Income
In figure, DD represents linear income Y2 C
A B
demand curve which is upward sloping Y1
and straight line. Let us suppose, we have
to measure income elasticity of demand at
D
point A of the linear demand curve
Which is extend to point E. E O Q1 Q2 X
It can be explained as below:
Demand
In figure,
Initial Income (Y1) = OY1 = AQ1
New Demand (Y2) = OY2 = CQ2
Change in Income (∆Y) = Y1Y2 = BC
Initial Quantity (Q1) = OQ1
New Quantity (Q2) = OQ2
Change in Quantity (∆Q) = Q1Q2 = AB

∆𝐐 𝐘 𝐐𝟏𝐐𝟐 𝐎𝐘𝟏
Income elasticity of demand (EY) at point A = × = ×
∆𝐘 𝐐 𝐘𝟏𝐘𝟐 𝐎𝐐𝟏

𝐀𝐁 𝐀𝐐𝟏
= × ------------------(i)
𝐁𝐂 𝐎𝐐𝟏
Now, In triangles ABC and EAQ1
1. < ABC = < EQ1A ( Right Angle)
2. < BAC = < AEQ1 ( Corresponding Angle)
3. < BCA = < Q1AE ( Remaining Angle)
Therefore, the triangles ABC and EAQ1 are similar. So that ratio of
corresponding sides of both triangles are equal. It can be written as:
𝐀𝐁 𝐄𝐐𝟏
Here, =
𝐁𝐂 𝐀𝐐𝟏
𝐀𝐁 𝐄𝐐𝟏
Now putting the value of , = in expression (i) then we get:
𝐁𝐂 𝐀𝐐𝟏
𝐄𝐐𝟏 𝐀𝐐𝟏
Income elasticity of demand (EY) at point A = ×
𝐀𝐐𝟏 𝐎𝐐𝟏
Cancelling the common AQ1, then we get,
𝐄𝐐𝟏
Income elasticity of demand (EY) at point A = > 1 [ EQ1 > OQ1, which shows
𝐎𝐐𝟏
relatively elastic or greater than one.)
There are three cases under this method which are as follows:
1. If income demand curve starts from the left of origin of X-axis income
elasticity of demand will be relatively elastic demand . i.e. EY > 1
2. If income demand curve passes through the origin income elasticity of
demand will be unitary elastic demand. i.e. EY = 1 which is explained with
the help of following figure:
Y
D
A

Income
In Figure, OD represents income
Demand curve which is upward
Sloping, straight line and passes
Through the origin. Therefore,
𝐎𝐐
EY at point A =
𝐎𝐐
=1 X
O Q
Demand
3. If income demand curve starts from the right of origin of X-axis income
elasticity of demand will be relatively inelastic demand . i.e. EY < 1 which is
explained with the help of following figure:

n Figure, BD represents income Y D

Demand curve which is upward A

Income
Sloping, straight line and starts
From the right origin. Therefore,
𝐁𝐐
EY at point A = < 1 [ BQ < OQ]
𝐎𝐐
X
O B Q
Demand
 Point Income Elasticity of Demand at
Non – Linear Demand Curve.
If the income demand curve is non linear then the income elasticity of demand at
a point can be computed by drawing a tangent line to that point and apply the
same formula that is used in case of linear demand curve.
D B1
In figure, DD represents non- linear Y
Demand curve. There are only two points
B
M
M and N along the DD non linear demand
N
Curve. The straight line AB is tangent to at D
Point N and the straight line A1B1 tangent
To at point M.

A O A1 Q Q 1 X
With the help of figure,
𝐀𝐐
EY at point N = > 1 [ AQ > OQ] Here, AB straight line passes through the left
𝐎𝐐
of origin.

𝐎𝐐𝟏
EY at point M = < 1 [ OQ1 < OQ] Here, A1B1 straight line passes through the
𝐎𝐐
right of origin.
 Measurement of Income Elasticity of Demand from Arc
Method on a linear demand curve
According to this method, income elasticity of demand is the coefficient of
average between two points of income – demand curve. This method is used
when there is big change in income and demand. It can be calculated as:
Change in demand
Average Quantity Demanded
Income Elasticity of Demand (EY) = Change in Income
Average Income

Change in demand
Initial demand + New demand
𝟐
Income Elasticity of Demand (EY) = Change in Income
Initial Income+ New Income
𝟐
 ∆𝐐
Q1+ Q2
𝟐
Income Elasticity of Demand (EY) = ∆𝐘
Y1+ Y2
𝟐
∆𝐐 Y1+ Y2
Income Elasticity of Demand (EY) = X
Q1+ Q2 ∆𝐘

Q2 −Q1 Y1+ Y2
Income Elasticity of Demand (EY) = X
Q1+ Q2 Y2 − Y1

Where,
Q1 = Initial Quantity Demand , Q2 = New Quantity Demand
Y1 = Initial Income, Y2 = New Income
For Example,
Point A B
Income 20,000 30,000
Demand 2,000 3,000
Income Elasticity of demand from Arc Method:
At the movement from A to B ,
Given, Y1 = 20,000, Q1 = 2,000, Y2 = 30,000, Q2 = 3,000
By using formula:
Q2 −Q1 Y1+ Y2 3,000 −2,000 20,000 + 30,000 1,000 50,000
EY = X = X = X =1
Q1+ Q2 Y2 − Y1 2,000+ 3,000 30,000 − 20,000 5,000 10,000

Interpretation:
EY = 1 Which shows income elastic demand of demand equal to unity . It means,
If 1 % increase in income level of the consumer leads to 1 % increase in demand
for a commodity and vice versa.