Elasticities of demand (YED)

Unit 2, Microeconomics

Engel curve

A curve showing the relationship between consumers’ income and quantity

demanded of a good. It indicates whether a good is normal or inferior.

Elasticity

A measure of the responsiveness of an economic variable (such as the quantity

demanded of a good) to a change in another economic variable (such as its price or

income).

Income elasticity of demand (YED)

The responsiveness of demand for a good or service to a change in income.

Luxury goods

Goods that are not considered essential by consumers therefore they have a price

elastic demand (PED > 1), or income elastic demand (YED > 1).

Necessity

The degree to which a good is necessary or essential. If the increase in demand for a

necessity good is less than proportional to the rise in income; then the necessity good

is income elastic.

Normal goods

A good where the demand for it increases as income increases.

Inferior goods

Lower quality goods for which higher quality substitutes exist; if incomes rise,

demand for the lower quality goods decreases.

Real income

The total value of all final goods and services produced in an economy in a given time

period, usually one year, adjusted for inflation.

Income

A flow of earnings from using factors of production to produce goods and services.

Wages and salaries are the factor reward to labour and interest is the flow of income

for the ownership of capital.

YED formula

YED = (% Change in Quantity Demanded) / (% Change in Income)