income elasticity of demand

• What does income elasticity of demand (YED) measure?

  Responsiveness of demand to income changes
• How is YED calculated?

  % change in quantity demanded / % change in income
• What characterizes an inferior good in terms of YED?

  YED < 0; demand falls as income rises. YED value is negative
• Give an example of an inferior good.

  Tesco Value goods
• What characterizes a normal good in terms of YED?

  YED > 0; demand rises as income rises. YED has a positive value
• What is a luxury good in terms of YED?

  A luxury good with YED > 1 therefore is elastic
• How do goods differ in terms of elasticity regarding income?

  Elastic if YED > 1; inelastic if YED < 1
• What is the significance of YED for businesses?

  • Understand sales impact from income changes
  • Adjust production based on economic conditions
  • Identify whether to produce luxury or inferior goods
• Why is it vital for businesses to know about YED during economic improvement?

  To predict potential increases in sales
• How might a firm's production change during times of prosperity?

  Produce more luxury goods, less inferior goods
• Increasing opportunity cost is when the price of one good increases relative to another good.