Income elasticity of demand (YED)

What is the formula for YED?

%change in QD/ % change in y

What does YED measure?

The responsiveness of quantity demanded to a change in income

Why is income elasticity of demand important to firms?

It can estimate how demand for its products will change following a change in income

What is the relationship of the YED compared to the responsive to change in income demanded? (The magnitude)

The higher the number, the more responsive to a change in income quantity demanded is

If YED is greater then 1, what is demand?

Income elastic

If YED is less then 1, what is demand?

Income in elastic

How does YED differ from PED?

YED can be positive or negative, so in YED the plus and minus sights are important because they show us whether a good is normal or inferior

What are most goods, normal or inferior?

Normal I.e. if income rises, demand rises or if income falls, demand falls

What is the YED for a normal good?

Positive

What is a necessity?

For normal goods, the site of the elasticity shows us the extent to which a good is regarded a necessity

A necessity is a good where YED is positive and less then one, indicating that as income rises consumers spend proportionally less on the good e.g potatoes

What is a luxury good?

Where YED is positive and greater then one indicating that as income rises consumers spend proportional more on the good e.g foreign holidays

Luxury good= YED is positive and negative

What is an inferior good?

A minority of goods are inferior goods and in this case demand will fall as income rises e.g value brands or bus journeys

YED will be negative

How does knowledge of YED benefit firms?

YED helps firms predict the effect of an economics cycle on sales

For example: Luxury products with high income elasticity see greater sales volatility over the business cycle then necessities where demand from consumers is less sensitive to changes in the cycle.