What does the income elasticity of demand measure?

The income elasticity of demand specifically measures how much the quantity demanded of a good or service responds to changes in consumer income. When income elasticity is calculated, it indicates whether a good is a normal good, for which demand increases as income rises, or an inferior good, where demand decreases as incomes increase.

In essence, the value of the income elasticity can determine the responsiveness of consumers to income changes; a higher elasticity indicates a significant change in quantity demanded with even a small change in income. This concept is crucial when analyzing market behavior, particularly in understanding consumer purchasing patterns based on their economic situation.

The other options focus on different aspects of demand: the degree of price change relates to price elasticity, shifts in demand due to preferences pertain to factors beyond income, and quantity demanded at different price points is related to the law of demand rather than income effects. Understanding income elasticity allows businesses and economists to predict how demand will react in varying economic conditions, providing essential insights into market trends.