Income elasticity of demand Cap 1

Define income elasticity of demand

A measure of the sensitivity of quantity demanded to a change in consumer incomes

Inferior goods

As incoms rise, consumers choose to spend on quality products

Normal goods

As incomes rise, demand rises for normal goods

Examples of normal goods

food, clothing, and household appliances

% change equation

%change = new - original / original * 100

Income elasticity equation

% change in quantity demanded / % change in income * 100

Negative yed value

Inferior good

Positive (0-1) value

Normal necessity

Positive yed value

Normal luxury

Factors that affect YED

• How attractive the product is

• Proportion of income spent

Significance of YED to a business

Helps businesses understand how consumer demand is likely to respond to rising or falling incomes

YED coefficent positive

Increase in income, will increase demand and a fall in income will decrease demand

YED coefficient negative

Increase in income will decrease demand and a fall in income will increase demand