Income elasticity of demand (YED)

What is income elasticity of demand (YED)?

The responsiveness of demand to a change in income.

Why is YED important to firms?

It helps businesses plan production and pricing based on expected income changes in the economy.

How does economic growth affect luxury goods?

Demand increases as income rises. (YED > 1)

How does economic growth affect inferior goods?

Demand decreases as income rises. (YED < 0)

What does YED = 0 mean?

Demand does not change when income changes.

What does 0 < YED < 1 indicate?

Income inelastic demand – demand rises slower than income (e.g., necessities).

What does YED > 1 indicate?

Income elastic demand – demand rises faster than income (e.g., luxury goods).

What does YED = 1 indicate?

Demand changes proportionally to income (unitary income elasticity).

How do firms adapt during economic growth?

They increase production of luxury goods and reduce inferior goods.