Income Elasticity of Demand (YED)

What does YED measure

the responsiveness of quantity demanded given a change in income

Calculation for YED

% change Qd / % change Income

Percentage change

Difference / Original x 100

What is the relationship between income and demand for normal goods

Positive relationship

Income goes up → Demand goes up

Income goes down → Demand goes down

What is relationship between income and demand for inferior goods

Inverse relationship

Income goes up → Demand goes down

How can you tell if a good is normal or inferior based on YED?

Normal good: YED is positive

Inferior good: YED is negative

What do you do when working out elasticity

Ignore the sign and focus on the nunber

What type of good is positive YED > 1?

Normal luxury

Describe what it means if a good has YED > 1?

It’s income elastic and demand increases proportionally more than the increase in income. As income rises, we buy much more.

What type of normal good is YED > 1?

Normal luxury

describe what it means if a good has YED < 1?

The good is income inelastic and demand increases, but proportionally less than the increase in income. We buy only slightly more.

What type of normal good is YED < 1

It’s a normal necessity

What elasticity is YED < 1

income inelastic.

What elasticity is YED > 1

income elastic

What type of good is YED negative?

The good is an inferior good.

For inferior goods, what does it mean if YED = 0?

Demand is perfectly income inelastic.

Do we distinguish between luxuries and necessities for inferior goods?

No, all inferior goods are treated the same in this context.

Inferior Good diagram

Normal Good diagram

Why does Income go on the Y axis

So we can have downward/upward sloping demand curves

What does an upward-sloping relationship between income and quantity demanded represent?

It represents normal goods, where demand increases as income rises.