A-level Economics Key content part 6

YED formula, values, types of elasticity and impact on types of goods

what does YED measure

the responsiveness of demand to a change in income

YED formula

% change in quantity demanded ÷ % change in income

what does a negative YED (<0) indicate

an inferior good – demand falls as income rises

give an example of an inferior good

supermarket own-brand goods – demand decreases as income rises

what does a YED between 0 and 1 show

a normal good – demand rises with income but less proportionally (income inelastic)

what does a YED greater than 1 show

a luxury good – demand rises more than proportionally with income (income elastic)

what does it mean if YED = 0

demand is completely unresponsive to income changes (perfectly income inelastic)

what does a normal good look like on a graph

upward sloping curve showing positive relationship between income and demand

what does an inferior good look like on a graph

demand falls as income rises, showing a negative YED
Definition

how do income changes affect demand for normal goods

as income increases, demand increases but at a decreasing rate

how do income changes affect demand for luxury goods

demand increases faster than income – YED greater than 1

how do income changes affect demand for inferior goods

demand decreases as income rises – YED less than 0

what type of elasticity is shown when the demand curve becomes steep as income rises

income inelastic demand

what type of elasticity is shown when the demand curve becomes flat as income rises

income elastic demand

why is knowing YED useful to businesses

it helps predict how demand will change with income levels, useful for planning during economic growth or recession

what happens to demand for luxury goods in a recession

it falls sharply because consumers have less disposable income

what happens to demand for inferior goods in a recession

it rises because consumers switch to cheaper alternatives

what happens to demand for necessities in a recession

stays stable – income inelastic demand

what type of elasticity does a luxury good show

strong positive slope, YED > 1

what type of elasticity does a necessity good show

weaker positive slope, YED between 0 and 1

if YED = 0.6, what type of good is it

a normal necessity (income inelastic)

if YED = 1.8, what type of good is it

a luxury good (income elastic)

if YED = -0.4, what type of good is it

an inferior good (negative income elasticity)

what type of goods tend to have high YED values

high-end products (e.g. designer clothing, holidays)

what type of goods tend to have low YED values

essential goods (e.g. bread, milk, basic utilities)

what is the difference between income elastic and inelastic demand

income elastic means demand changes more than income; income inelastic means demand changes less than income

why might firms sell both normal and inferior goods

to balance revenue – inferior goods sell better in recessions, normal goods sell better in booms

what type of elasticity does this graph show

perfectly income inelastic – demand stays constant regardless of income

what type of elasticity does this graph show

income elastic – steep positive curve, large change in demand for small income rise

summarise the three main YED types

negative = inferior; 0–1 = normal; >1 = luxury