3.1.3.2 YED

Define income elasticity of demand

Measures the extent to which the demand for a good changes in response to a change in income

How do you calculate income elasticity of demand?

% change in quantity demanded / % change in income

What are the 2 types of goods?

• normal goods

• inferior goods

Is the YED of a normal good, positive or negative?

Positive

Why?

As quantity demanded of a normal good rises as income rises

Is the YED of an inferior good, positive or negative?

Negative

Why?

As quantity demanded if an inferior good fall as income rises

What are the 2 types of normal goods?

• necessity (staple normal good)

• luxury (luxury normal good)

What is the coefficient for a normal good vs luxury normal good?

Luxury normal good - more than 1

Staple normal good - between 0 and 1

Example of a good where YED is strongly positive?

Fines wines, spirits, luxury holidays, and high quality chocolate

Example of a good wheee YED is lower?

Mass transport (bus + rail)

Why is YED important for a firm?

Businesses can know how to price their product

Examples of luxury goods?

• luxury chocolate

• exclusive resorts

• business class travel

• fine wines and dining

Examples of inferior goods?

• urban bus transport

• economic class travel

• own label discounters (aldi own)

If YED is 2.5

Is it a normal good or inferior good?

If it’s a normal good, is it luxury or necessity?

It is income elastic or inelastic?

• normal

• luxury normal good

• income elastic

Should YED for a luxury good be positive and greater than 1?

Yes

Is this true of false?

The London Underground is estimated to have a YED +0.2. Thus us because it is income inelastic

True

If income and quantity demanded both decreases, is this a normal or inferior good?

A normal good