It measures the relationship between a change in quantity demanded for good X and a change in consumers' real income.
Formula = % change in quantity demanded for X / % change in real income.
Formula = %QD / %Y
Coefficients of Income Elasticity of Demand
Normal Goods - they have a positive income elasticity
Luxury Goods - where the income elasticity > H
Necessities - here the income elasticity > 0 and < H
Inferior Products - these have negative income elasticity
Inferior goods are counter cyclical goods - this means they are products whose demand varies inversely to the economic cycle - this means that demand rises in a recession. [Paper 3]
Normal Luxuries & Normal Necessities
Normal goods have a positive YED which means that YED > 0. When incomes are falling, demand for normal & necessary goods, to a lesser extent, will fall.
Normal necessary products: (income inelasticity, YED>0<1)
Low but positive income elasticity. E.g. Milk
Normal Luxuries : (income, YED>1)
These products have a high - and positive - income elasticity.
