The
quantity demanded of a particular product depends not only on its own price and
on the price of other related products, but also on other factors such as
income. The purchases of certain commodities may be particularly sensitive to
changes in nominal and real income. The concept of income elasticity of demand
therefore measures the percentage change in quantity demanded of a given
product due to a percentage change in income.
The measures of income elasticity of
demand may be either positive or negative numbers and these have been used to
classify products into "normal" or "inferior goods" or into
"necessities" or "luxuries". If as a result of an increase
in income the quantity demanded of a particular product decreases, it would be
classified as an "inferior" good. The opposite would be the case of a
"normal" good. Margarine has in past studies been found to have a
negative income elasticity of demand indicating that as family income
increases, its consumption decreases possibly due to substitution of butter.