2.2.4 Income elasticity of demand (YED)

What is YED?

Income elasticity of demand measures how much demand changes when consumer income changes.

Why is YED important for firms?

Firms use YED to plan sales and pricing depending on whether incomes rise or fall in the economy.

What happens to demand for luxury goods when incomes rise?

Demand for luxury goods increases; YED > 1, meaning income elastic.

What happens to demand for normal necessary goods when incomes rise?

Demand rises but by a smaller proportion than income; 0 < YED < 1, income inelastic.

What happens to demand for inferior goods when incomes rise?

Demand falls; YED < 0, as consumers switch to better alternatives.

What does YED = 1 indicate?

Demand changes proportionally with income; unitary income elasticity.

How can changes in government policy affect YED?

Policies that affect disposable income, like tax rises or cuts, will change demand according to the YED of products.

During economic growth, how might firms adjust production?

They might produce more luxury goods and fewer inferior goods, reflecting rising incomes.