4. Income Elasticity of Demand

What is Income Elasticity of Demand? (YED)

A measure of how responsive quantity demanded is to changes in income.

How is YED calculated?

% change in quantity demand / % change in income

What is a normal good and how can we identify one?

Goods where the quantity demanded slightly rises as income rises. e.g clothes, food.

Has a positive income elasticity of 0-1.

What is a luxury good and how can we identify one?

Goods where the quantity demanded rises significantly as income rises. e.g luxury clothing, meals out.

Has a positive income elasticity of 1<

What is an inferior good and how can we indentify one?

Goods where quantity demanded falls as income levels rise. e.g public transport, own brand products.

Has a negative income elasticity.

What can YED be used for?

1. Helping firms predict the effects of a change in income on demand.

2. Helps businesses spread risks by offering products at different price points which appeal to a range of people.

3. Helps businesses switch the kind of products they produce in relation to rising/ falling incomes.

What are the limitations of using YED?

- Values are based on estimates

- Forecasting changes in demand is difficult

- Information used to calculate YED may become outdated.

Draw a YED diagram.

Name the types of goods and their elasticities.

Luxury : + 1+

Normal: +0-1

Inferior: -