Income Elasticity of Demand (YED) Overview

These flashcards cover key concepts related to the income elasticity of demand, including definitions, examples, and related economic implications.

Income Elasticity of Demand (YED)

A measure of the responsiveness of demand to changes in income calculated as the percentage change in quantity demanded divided by the percentage change in income.

Normal Goods

Goods for which demand increases as income increases and have a positive income elasticity of demand.

Inferior Goods

Goods for which demand decreases as income increases, indicated by a negative income elasticity of demand.

Engel Curve

A curve that shows the relationship between consumer income and demand for a product, indicating whether a good is normal or inferior.

Income Inelastic Demand

When the demand for goods changes less than proportionately to a change in income; YED < 1.

Income Elastic Demand

When the demand for goods changes more than proportionately to a change in income; YED > 1.

Examples of Income Elastic Demand

Industries like restaurants, movies, healthcare, and foreign travel that grow faster than national income.

Examples of Income Inelastic Demand

Industries such as food, clothing, and furniture that grow slower than national income.

Substitution Effect in Primary Sector

As income rises, demand for natural goods like cotton is often replaced by synthetics due to technological improvements.

Impact of Recession on YED

During a recession, luxury goods (high YED) see significant sales drops, while necessities (low YED) remain stable.

Sectoral Structure of the Economy

Refers to the primary, manufacturing, and services sectors, with varying YED implications for economic growth.

High YED and Business Strategy

A high YED indicates a high-potential, expanding market, suitable for future investment.

Low YED and Economic Stability

A low YED indicates a mature or slow-expansion market, usually more resilient during economic downturns.