Income elasticity of Demand

YED hsows how responsive the quantity demanded for a product is to a change in real income

The formula for YED is % change in quantity demanded over % change in real income

1. Inferior Goods

• Definition: Goods for which demand decreases as income rises. Consumers switch to higher-quality substitutes when their income improves.

• YED Range: Negative (YED<0YED < 0YED<0).

• Examples: Instant noodles, bus travel (when people switch to cars or taxis as income increases).

2. Normal Goods

• Definition: Goods for which demand increases as income rises.

• YED Range: Positive (YED>0YED > 0YED>0).

• Subcategories:

  • Necessities: Goods with relatively inelastic income response.

  • Luxuries: Goods with elastic income response.

(a) Normal Necessities

• Definition: Goods for which demand increases with income, but at a slower rate. These are essential goods.

• YED Range: Between 0 and 1 (0<YED<10 < YED < 10<YED<1).

• Examples: Groceries, basic clothing, utilities like electricity.

(b) Normal Luxuries

• Definition: Goods for which demand increases more than proportionally to an income increase. These are often discretionary or high-end goods.

• YED Range: Greater than 1 (YED>1YED > 1YED>1).

• Examples: Designer clothes, fine dining, luxury cars.