1.2.5 Income elasticity of demand

How is YED calulated

% change in quantity demanded / % change in income

How is YED value expressed

Positive or negative

What does a YED value of 1 mean

For every 1% income changes demand changes by 1% in the same direction

Income elasticity of each Type of good

1. Luxury good - Product with a highly positive YED

2. Normal good - Product with a slightly positive YED

3. Inferior good - Product with a Negative YED

YED of a Luxury Good

Highly positive YED

What two facors influence income elasticity

1. The economy eg recession

2. The type of good eg luxury, inferior)

Effects of changes in the economy on Price elasticity

• During a Recession, demand for Inferior Goods rise + Luxury Goods fall

• During Economic Growth, demand for Luxury goods rise + Inferior Goods fall

3 Benefits of knowing Income Elasticity

1. Can predict changes in income and plan increase or decrease in production/workforce accordingly

2. Can prepare sources of finance eg loans for predicted reductions in cash flow

3. Can launch luxury/inferior goods to Capitalise when incomes rise/fall

YED figure meaning

Inelastic - 0-1

Elastic - Over 1.01