YED

What does YED stand for?

Income elasticity of demand

What does YED measure?

The relationship between a change in quantity demanded for a good and a change in consumers real income

What is the formula for YED?

% Change in QD for X/ % Change in real income

What type of elasticity do normal goods have?

Positive income elasticity

What type of elasticity do luxury goods have?

Greater than one

What type of elasticity do necessities have?

More than 0 and less than one

What type of elasticity do inferior products have?

Negative

What type of goods are inferior goods?

Counter cyclical goods

What is a counter cyclical good?

They are products whose demand varies inversely to the economic cycle meaning demand rises in a recession

Why is what is considered a luxury contextual?

It depends on the economic circumstances of the consumers involved

When incomes are falling what happens to demand for normal and necessary goods?

Fall to a lesser extent

What does a necessity and luxury depend on (as it is contextual)?

The economic circumstances of the consumers involved

What is an inferior good?

If after an increase in real income less of a good is purchased

What type of YED does an inferior good have?

Negative

When real incomes are rising during a period of economic growth what happens to the demand for inferior goods and what does this cause on the demand curve?

Demand will fall causing an inwards shift of the demand curve

When real incomes are falling during a period of recession if wages are rising more slowly than prices then what happens to the demand for inferior goods?

It will rise

What does knowledge of YED help firms to do?

Predict the effect of changes in the macroeconomic cycle on their sales

When is demand likely to be price elastic?

When the good or service has many close substitutes and when it is easy or costless to switch demand