b) Income elasticity of demand

a) understanding of income elasticity of demand

b) use formulae to calculate income elasticities of demand

c) interpret numerical values of income elasticity of demand: inferior, normal, and luxury goods, relatively elastic and relatively inelastic

d) the factors influencing elasticities of demand

income elasticity of demand = how sensitive the change in quantity demanded is to the change in real consumer income

YED = (%ΔQD) / (%ΔY)

• income elasticity of demand = percentage change in quantity demanded / percentage change in real consumer income

if YED < 0

• the good is an inferior good

  • increase in real consumer income → decrease in quantity demanded

  • gradient = negative

if 0 < YED < 1

• the good is relatively income inelastic

• the good is a normal necessity good

  • increase in real consumer income → smaller increase in quantity demanded

  • gradient > 1

if YED > 1

• the good is relatively income elastic

• the good is a normal luxury good

  • increase in real consumer income → larger increase in the quantity demanded

  • 0 < gradient < 1

factors that influence YED

• decrease in real income

  • increase in quantity demanded for inferior goods

  • decrease in quantity demand for normal and luxury goods

• increase in real income

  • decrease in quantity demanded for inferior goods

  • increase in quantity demanded for normal and luxury goods