Aside from the price of a product and its substitutes, another significant element of demand for a product is consumer's income. As noticed previously, relationship between demand for regular and luxury goods and consumer's income is of positive nature, not like negative price-demand relationship. Which implies, the demand for regular services and goods rises with the rise in consumer's income and vice versa. Reaction of demand to the change in consumer's income is called income elasticity of demand.

Income elasticity of demand for a product, say X (i.e., e_x) is defined as

Where X = quantity of X demanded; Y = disposable income; ΔX = change in quantity demanded of X; and ΔY = change in income.

Unlike price elasticity of demand (that is negative except in case of Giffen goods),

Income elasticity of demand is positive due to a positive relationship between demand and income for a product. There is an exemption to this rule. Income elasticity of demand for an inferior good is negative, owing to negative income-effect. Demand for inferior goods decrease with the rise in consumer's income and vice versa. When income is more, consumers change over to consumption of superior commodities. Which implies they replace inferior goods for superior ones. For example, when income increases, people would rather purchase more of wheat and rice and less of inferior food grains such as ragi, bajara and use more of taxi and less of bus service and so on.