income elasticity of demand

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The ratio of proportional increase in quantity demanded to proportional increase in income, with all prices held constant. A luxury is a good with an income elasticity of demand in excess of unity: a higher proportion of income is spent on luxuries as income rises. A necessity has an income elasticity of demand which is positive but less than unity: as income rises, spending on a necessity rises, but the proportion of income spent on it falls. An inferior good has a negative income elasticity of demand: as income rises, spending on inferior goods falls. See also Engel curve.

Subjects: Economics.

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