YED (income elasticity of demand)

Income elasticity of demand

income elasticity of demand is a measure of how much the quantity demand of a good will change in response to a change in consumers’ incomes.

Calculating income elasticity of demand helps us see the differences in consumer responsiveness to changes in income, and to make generalisations about how changing incomes may impact consumer choice.

inferior good or normal good?

if YED > 0 —> good is a normal good
if YED < 0 —> good is an inferior good

income elastic demand

-1<yed<1. any value in this range occurs when the percentage change in quantity demanded is less than the percentage change in income. In other words, consumers are not very responsive to income changes when demanding the good .

Very inelastic demand

the closer the value to zero, the more inelastic the demand is. These are typically necessity, which consumers need. Higher incomes generally do not cause people to consume more of the good, especially if their incomes are already at a level where they have what they need.

examples —> bread, toilet paper, water.

income elastic demand

values above 1 or lower than -1 (yed<-1, yed>1), indicate income elastic demand.

Values occur in this range when percentage change in quantity demanded is greater than the percentage change in income. (consumers are very responsive to income changes when demanding the good).

good with positive income elastic demand tend to be superior goods.