1.2.3 Income elasticity of demand (YED)

YED definition

A measure of the responsiveness of quantity demanded to a change in income

What is the positive relationship between luxury goods and YED

YED is strongly positive with luxury goods

What does YED value between 0 and 1 imply about a good

Normal good, rise in income, rise in demand

What is a type of normal good that is greater than one

Luxury good is when YED is greater than one

Define inferior good in terms of YED

When YED is less than zero. A rise in income will lead to a fall in demand for the good.

What can goods also be classified as

They can be elastic or inelastic in income

Normal good when YED is greater than one

Demand is income elastic - normal luxury

Normal good when YED is less than one

Demand is income inelastic- normal neccessity

Inferior good when YED is greater than one

Demand is income elastic

Inferior good when YED is less than one

Demand is income inelastic

For whatever good , YED is zero

Demand is perfectly income inelastic

What is the significance of YED

Important for business to know how their sales will be affected by changes in the income of the population.

How may YED impact firms

It may have an impact on the type of goods that a firm produces. During times of prosperity. firms might produce more luxury goods and less inferior goods