1.2.3c - income elasticity of demand

income elasticity of demand abbreviation

YED

YED definition

measures the responsiveness of demand to a change in income

YED formula

percentage change in demand/percentage change in income

alternative formula for YED

(og income/og demand) x (change in demand/change in income)

two types of goods involved

inferior goods = ppl buy more when they are poorer (eg. primark, aldi)

normal goods = ppl buy more when they are richer (eg. bershka, kokoro)

on a YED graph, whats on the x and y

x = quantity demanded

y = income (NOT PRICE!!)

inferior goods YED

will have a negative relationship btw income and quantity demanded

as income goes up, demand goes down

normal goods YED

will have a positive relationship btw income and quantity demanded

as income goes up, demand goes up

some goods can be…

…both normal and inferior, depending on income

eg. loaf of bread:

can be normal on low incomes (buy more as income rises)

can be inferior on high incomes (buy fancier alternatives like sourdough so less bread)

income elastic demand

YED>1

change in income results in larger percentage change in demand

income inelastic demand

YED<1

change in income results in smaller percentage change in demand

unitary income elasticity

YED = 1

change in income results in proportional change in demand

main factor affecting income elasticity of demand

necessity vs luxury

necessities

income inelastic

if income falls, people will still buy

if income rises, people won’t buy loads more

luxuries

income elastic

income falls, people won’t buy them anymore

income rises, people buy more (can afford it)