Income Elasticity of Demand

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?