Income Elasticity of Demand

• What does YED stand for in economics?


  Income Elasticity of Demand
• How does a change in income affect demand?


  Changes in income lead to effects on demand for some products more than others
• What does YED measure?


  YED measures the responsiveness of quantity demanded given a change in income
• What is the formula for calculating YED?


  YED = % change in Quantity demanded / % change in income
• What does it indicate if YED is between 0 and 1?


  It indicates that demand is inelastic
• What does it indicate if YED is more than 1?


  It indicates that demand is elastic
• What type of goods have a YED less than 0?


  Inferior goods
• What happens to the demand for inferior goods as income increases?


  As income goes up, demand goes down
• What type of goods have a YED between 0 and 1?


  Normal necessity goods
• What happens to the demand for normal necessity goods as income increases?


  As income goes up, demand goes up
• What characterizes normal luxury goods in relation to income changes?


  There is an even bigger increase in demand as income increases
• What does a unitary elastic good indicate about changes in demand and income?


  A unitary elastic good has a change in demand equal to the change in income
• What factors affect YED?


  • Necessity: Basic goods that consumers need (e.g., food, electricity, water)
  • Demand becomes income inelastic
  • Luxuries: Goods that consumers like to buy if they can afford them (e.g., air travel, branded fashion, supercars)
  • Demand becomes income elastic
• How does demand for necessity goods change as income increases?


  Demand for necessity goods becomes income inelastic
• How does demand for luxury goods change as income increases?


  Demand for luxury goods increases as income increases
• What happens to the demand for inferior goods when income increases?


  Demand for inferior goods decreases as income increases