Income Elasticity of Demand

Income elasticity of demand measures the degree to which consumers respond to a change in their incomes by buying more or less of a particular good. The formula to determine the coefficient of income elasticity of demand is Ei = % change in quantity demanded / % change in income. Normal goods are defined as those goods whose income-elasticity coefficient is positive. As income rises these goods are in more demand. Inferior goods are those goods whose income-elasticity coefficient is negative. The demand for these goods are lower as income rises. The study of income elasticity coefficients help explain the expansion and contraction of industries in the United States. As incomes in the United States rise, industries producing products for which demand is quite income-elastic have expanded their outputs. Automobile, housing, and restaurant industries have shown strong growth outputs because, on average, the total income in the economy has grown 2 to 3 percent annually. When recessions occur and people's incomes decline, grocery stores fare relatively better than stores selling electronic equipment. Engel's law is an observation stating that, with a given set of tastes and preferences, as income rises, the proportion of income spent on food falls, even if actual expenditure on food rises. In other words, the income elasticity of demand of food is less than 1. For normal goods, the Engel curve has a positive slope. That is, as income increases, the quantity demanded increases. For inferior goods, the Engel curve has a negative slope. That means that as the consumer has more income, they will stop buying the inferior goods because they are able to purchase better goods.
Although food is considered a normal good, restaurant meals are considered a luxury good and the income elasticity of demand for food is less than 1, the demand for restaurant meals is much more elastic.

References
McConnell, C.R., & Brue, S.L. (2004). Economics: Principles, Problems, and Policies. New York: The McGraw-Hill Companies.
Income elasticity of demand. Retrieved April 25, 2007 from http://en.wikipedia.org/wiki/Income_elasticity_of_demand
Engel's Law. Retrieved April 25, 2007 from http://en.wikipedia.org/wiki/Engel%27s_law