income elasticity of demand (YED)

YED

measures the responsiveness of demand to a change in income

can be both neg and pos

YED equation

% change in quantity demanded / % change in income

normal goods income elasticity

Demand ↑ as Income ↑

income expenditure increases as individuals have more disposable income

YED > 0

e.g fresh fruits, branded products

Inferior goods income elasticity

Demand ↓ as Income ↑

Goods where demand falls as income rises.

YED < 0

e.g instant noodles, bus travel, supermarket own-label products.

luxury goods

Demand ↑( strong response) as Income ↑

Goods where demand rises more than proportionally as income rises.

YED > 1

e.g fresh fruits, branded products, designer clothes, sports cars, fine dining, holidays abroad.

the amount that expenditure increases depends on.....

types of goods consumed

how much income has increased

whether the price of goods has changed

evaluating YED

-allows firms to make appropriate stock decisions

-Depends on the good → Some goods may be normal at low incomes, but inferior at higher incomes (e.g., own-brand pasta).

-Depends on income distribution → If only the rich get richer, luxury demand ↑ but necessities may not change.

-Time lag → Demand responses to income changes may take time.

short-run vs long-run = overtime YED products can change and evolve

-Elasticities are estimates → Difficult to calculate precisely (use survey data, past trends).

diagram shifts (as income rises)?

Normal good: Demand curve shifts outwards (right) as income ↑.

Inferior good: Demand curve shifts inwards (left) as income ↑.

(You don't move along the curve — it's a shift because income is a determinant of demand.)

Importance of YED for firms

For Firms:

Forecasting sales:

-Necessities = stable demand.

-Luxuries = volatile demand (high in booms, collapse in recessions).

Product positioning: supermarkets use YED to decide between selling "value" vs "premium" ranges.

Importance of YED for government

For Government:

-Tax revenue forecasting → VAT revenue falls in recessions as demand for luxuries falls.

-Welfare planning → higher demand for inferior goods in recessions may increase inequality.

business cycle link

Boom: demand for luxuries ↑↑, strong growth.

Recession: demand for luxuries ↓↓↓, demand for inferior goods ↑.