This paper proposes an optimal economic dispatch of a grid connected microgrid. The microgrid consists of solar photovoltaic, diesel and wind power sources. An Incentive Based Demand Response Program is incorporated into the operations of the grid connected microgrid. The optimal dispatch strategy is obtained by minimizing the conventional generators fuel cost, the transaction costs of the transferable power and maximizing the microgrid operator's demand response benefit whilst simultaneously satisfying the load demand constraints amongst other constraints. The developed mathematical model is tested on two practical case studies and sensitivity analysis of the model to key parameters was also performed. Case study 1 consists of three conventional generator units, one wind generator, one solar generator and three rural customers. Case study 2 is a much larger microgrid and was chosen to test the applicability of our model to larger microgrids and also to verify the scalability of our algorithm. Results show that the demand response program curtails significant grid relieving amounts of energy in the two case studies considered and integration of an incentive based demand response programs into the microgrid energy management problem introduces optimality at both the supply and demand spectrum of the grid. (C) 2016 Elsevier Ltd. All rights reserved.