What does income elasticity of demand measure?

Income elasticity of demand measures the responsiveness of the quantity demanded of a good or service to changes in consumer income. Specifically, it quantifies the percentage change in quantity demanded resulting from a percentage change in income. If the income elasticity is greater than one, the good is considered a luxury since demand increases proportionally more than the increase in income. Conversely, if the elasticity is less than one, the good is a necessity, meaning demand increases at a slower rate than income.

This concept is crucial for understanding consumer behavior and market dynamics, as it helps businesses and economists predict how changes in the economy—such as a rise in income—will affect sales of various products. Thus, the correct answer encapsulates the relationship between income changes and demand fluctuations effectively.