b) income elasticity of demand

• define income elasticity of demand

• how responsive the change in quantity demanded is to the change in real consumer income

• state the formula for YED

• YED = (%ΔQD) / (%ΔY)

• income elasticity of demand = percentage change in quantity demanded / percentage change in real income

• state the type of good if YED < 0

• define this type of good

• state what the gradient of this type of good would look like

• inferior good

• increase in real consumer income → decrease in quantity demanded

• gradient = constant and negative

• state the type of good if 0 < YED < 1

• state the income elasticity of this good

• define this type of good

• state what the gradient of this type of good would look like

• normal necessity good

• relatively income inelastic

• change in real consumer income → smaller change in quantity demanded

• gradient > 1

• state the type of good if YED > 1

• state the income elasticity of this good

• define this type of good

• state what the gradient of this type of good would look like

• normal luxury good

• relatively income elastic

• change in real consumer income → larger change in quantity demanded

• gradient = constant and positive, gradient < 1

• state the factors that influence YED

• state how a high value of these factors affects YED

• decrease in real consumer income

  • increase in quantity demanded for inferior goods

  • decrease in quantity demanded for normal goods

• increase in real income

  • decrease in quantity demanded for inferior goods

  • increase in quantity demanded for normal goods