Income elasticity of demand (IED) refers to the sensitivity of the quantity demanded for a certain good to a change in real income of consumers who buy this good, keeping all other things constant.

Knowledge of IED helps firms predict the effect of an economic cycle on sales.

**Formula to calculate income elasticity of demand.**

**Example:**

Suppose the percentage change in quantity demanded was 20% and the percentage change in consumers income was 50%. Calculate the income elasticity of demanded.

Therefore, the IED is 0.4.

Since we got a positive but less than 1 IED, this indicates that these are normal goods.