1.2.5 income elasticity of demand

what is YED

it measures the extent to which the quantity of a product demanded is affected by a change in income

YED formula

% change in quantity demanded / % change in income

luxury product YED value and meaning

• a positive YED more than 1

• meaning that demand for luxury products grows faster than the increase in income

• as income grows, proportionally more is spent on luxuries

necessity product YED value and meaning

• positive YED of less than 1 but more than 0

• meaning that as income rises, demand rises but at a slower rate than increased income

• as income grows, proportionally less is spent on necessities

inferior products YED value and meaning

• negative YED of less than 1 - below 0

• as income rises demand falls

• as income falls demand rises

what is classified as a normal good

• luxuries

• necessities

what is an inferior good

• value products

• e.g. supermarket own brands

how YED affect business decisions

• firms may promote products with a negative YED during times of low income

• firms may focus on promoting products with a positive YED during times of higher income