YED

YED definition

Measures the responsiveness of QD given a change in income

YED formula

Percentage change in QD / percentage change in income

Percentage difference

New - original / original x 100

Positive value of YED is a..

Normal good - proportionate relationship between income + demand, so as income rises, so does demand

Negative value of YED is a..

Inferior good - inverse relationship between income + demand, so if income rises, demand falls

Once you determine if a good is normal or inferior, you can ignore the sign

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YED>1 - for a normal good - SHALLOW CURVE

Demand is income elastic - normal luxury

If incomes increase, QD for this good will rise proportionately more than the increase in income

If your income rises, you would buy more luxury goods

YED<1 - for a normal good - STEEP CURVE

Demand is income inelastic - normal necessity

If income increases, QD for this good will rise but proportionately less than the increase in income

E.g. Even when your income increases, you are still buying roughly the same amount (you were already buying it before your increase of income)

YED>1 - for an inferior good - SHALLOW CURVE

Demand is income elastic

YED<1 - for an inferior good - STEEP CURVE

Demand is income inelastic

YED = 0

Demand is perfectly income inelastic

There is no relationship between income and QD

If curve is downwards sloping then..

Inferior good - negative relationship between income + demand

If curve is upwards sloping then..

Normal good - positive relationship between income + demand

INCOME INELASTIC - STEEPNESS OF CURVE?

STEEP

INCOME ELASTIC - STEEPNESS OF CURVE

SHALLOW

What are the factors influencing elasticities of demand for YED?

• Proportion of income spent - e.g. goods that take up a small proportion of income (toothpaste) tend to have low YED as demand is less sensitive to income changes

• Economic conditions - boom: demand for luxury goods rises, recession = demand for inferior goods rises

• Long-run - consumers might have to adjust their lifestyle - leading to higher YED for certain goods

• Short-run - consumers may not immediately change their spending habits after an income change