What is "Income Elasticity of Demand"?

In games, Income Elasticity of Demand is relevant for understanding the relationship between how much the player is earning (for instance, in a soft currency like Gold) and how much they choose to spend on a particular virtual item (for instance, spending Gold to upgrade their gear). Since games often provide increasing rewards over time to reflect the player's increasing skill or progress in the game, we would expect that what they choose to spend their growing wealth on will also change.

For instance, if the player levels up in the game and is now earning more Gold on average, we may expect them to start spending that Gold on more powerful gear so that they can contend with more powerful opponents. This more powerful gear can be said to be positively elastic: when the player earns more, demand for more powerful gear increases. Conversely, the player may stop buying less powerful gear since they can now afford better gear: the less powerful gear is negatively elastic, because the player demands less of it when they earn more.

Income Elasticity of Demand can also be applied to game monetisation. As a player earns more through gameplay, their perception of certain premium purchases may change, thus making them more or less likely to buy them.

By speculating on the Income Elasticity of Demand of different in-game items, game designers can gain a deeper understanding of how to best offer and distribute these rewards, ensuring that they are appropriately lucrative to players.