Final answer:
The percentage change in quantity demanded divided by the percentage change in income is called the income elasticity of demand. This economic measure indicates how sensitive the demand for a good is to changes in consumer income, reflecting whether goods are necessities, luxuries, or inferior.
Step-by-step explanation:
The formula you're referring to calculates the income elasticity of demand. This metric assesses how the quantity demanded of a good or service is affected by changes in consumers' income. Specifically, the income elasticity of demand is determined by taking the percentage change in quantity demanded and dividing it by the percentage change in income. If this elasticity is greater than 1, the good is considered a luxury; if it's less than 1, it's a necessity; and if it's negative, the good is inferior, meaning demand decreases as income increases.
Elasticity is not just limited to income impacts. It's a versatile concept in economics that measures responsiveness and can be applied to various market scenarios. For example, we have cross-price elasticity of demand, wage elasticity of labor supply, and elasticity of savings concerning interest rates, among others.