When we say that the income elasticity of demand for a good is less than 1, it indicates that the good is considered a necessity rather than a luxury. In simpler terms, it means that as consumers’ income changes, the quantity demanded for that good changes at a slower rate compared to the change in income.
Specifically, if the income elasticity of demand is a positive value but less than 1, it signifies that a percentage increase in income will lead to a smaller percentage increase in the quantity demanded of the good. For example, if the income elasticity of demand for a product is 0.5, a 10% increase in consumer income would result in only a 5% increase in the quantity demanded for that product.
This concept helps businesses and policymakers understand consumer behavior. Goods with income elasticity less than 1 are often essential items like basic groceries, utilities, or healthcare products, which people continue to purchase regardless of small fluctuations in their income. Such goods are less sensitive to income changes, highlighting their importance in daily life.