Income elasticity of demand

• What is the definition of income elasticity of demand (YeD)?


  It measures how demand changes in response to a change in income.
• What happens to demand for most products when income changes?

  A change in income leads to a change in demand for the majority of products.
• What are normal goods?


  Normal goods see a rise in demand when incomes rise.
• What distinguishes luxury goods from normal goods?

  Luxury goods see a significant rise in demand when incomes rise.
• What are inferior goods?

  Inferior goods see a fall in demand when incomes rise.
• How do you calculate income elasticity of demand (YeD)?


  YeD = % change in quantity demanded / % change in income.
• What does a positive YeD value indicate about a good?


  It indicates that the good is a normal good.
• What does a YeD value greater than 1 indicate?


  It indicates that the good is a luxury good.
• What does a negative YeD value indicate?


  It indicates that the good is an inferior good.
• If household income rises from £1,000 to £1,100 and demand for electricity rises from 200 units to 202 units, what is the % change in demand?


  The % change in demand is 1%.
• If household income rises from £1,000 to £1,100, what is the % change in income?


  The % change in income is 10%.
• What is the YeD for electricity if the % change in demand is 1% and the % change in income is 10%?


  The YeD is 0.1.
• What does a YeD of 0.1 tell us about electricity?


  It indicates that electricity is a normal good and inelastic.
• If household income rises from £1,000 to £1,100 and demand for takeaways rises from 2 to 3 a month, what is the % change in demand?


  The % change in demand is 50%.
• What is the YeD for takeaways if the % change in demand is 50% and the % change in income is 10%?


  The YeD is 5.
• What does a YeD of 5 tell us about takeaways?


  It indicates that takeaways are a normal good and a luxury good, and elastic.
• What are the characteristics of luxury goods?

  Luxury goods are largely treat items and highly responsive to income changes.
• What happens to demand for inferior goods when income falls?


  Demand for inferior goods tends to increase as people seek cheaper alternatives.
• What factors can affect income?

  The state of the economy, rates of inflation, and income tax can all affect income.
• How does a booming economy affect income?


  A booming economy leads to higher incomes for more people.
• How does inflation impact consumer spending power?


  High inflation can reduce spending power even if incomes are rising.
• Why might a firm stock products with different income elasticities of demand?


  To meet varying consumer demands as incomes change across different demographics.
• How can YeD change over time?


  Products can shift from being luxury items to essential items as consumer preferences change.
• How do expensive items respond to small changes in income compared to cheaper items?


  Expensive items are less responsive to small changes in income than cheaper items.
• What are the types of goods based on income elasticity of demand?


  • Normal goods: Demand rises with income.
  • Luxury goods: Significant rise in demand with income.
  • Inferior goods: Demand falls with income.
• What are the implications of a negative YeD?


  • Indicates an inferior good.
  • Demand increases when income decreases.
  • Often low-quality, budget alternatives.
• What are the implications of a YeD greater than 1?


  • Indicates a luxury good.
  • Highly responsive to income changes.
  • Demand significantly increases with income.
• What are the implications of a YeD between 0 and 1?


  • Indicates a normal good.
  • Inelastic demand: Less responsive to income changes.
  • Essential items that are necessary regardless of income.