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What is income elasticity of demand?
Income elasticity of demand measures the responsiveness of demand to a change in income.
How do you calculate income elasticity of demand?
YED= % change in quantity demanded / % change in income
Does a minus sign change how YED results are interpreted?
Yes.
What 3 categories can YED results placed into?
Income elastic
Income inelastic
Negative income elasticity
Income elastic products have a YED value of…
More than 1 (positive and HIGH).
Describe income elastic products.
A change in income causes a more than proportional change in the quantity demanded.
What type of products are income elastic?
Luxury goods and services
Income inelastic products have a YED value of…
Between 0 and 1 (positive and LOW).
Describe income inelastic products.
A change in income causes a less than proportional change in the quantity demanded.
What type of products are income inelastic?
Normal necessities e.g. fresh fruit.
Negative income elastic products have a YED value of…
Less than 0.
If income rises then demand falls, and vice versa.
What type of products have a negative income elasticity of demand?
Inferior goods e.g. own brand label food.
How does income elasticity of demand affect business decision making?
