YED

Measure of responsiveness of demand to a change in income.

Inferior good - there is a better substitute

• When income increases, demand decreases

• Always a negative YED

Normal good - regular good

• When demand for a product increases when income increases

• Always a positive YED

• Either necessity or luxury

Necessity - e.g. groceries

• Income elasticity less than one but more than 0

• As income grows, proportionally less is spent on necessities

Luxury - e.g. holiday

• Income elasticity = more than 1

• As income grows, proportionally more is spent on luxuries

YED = % change in quantity demanded/% change in income

Factors affecting YED:

• Income level

YED helps businesses be aware of who they are targeting.

People have become more price sensitive due to cost of living.