Income elasticity

• What does tYED stand for?

  Income elasticity of demand
• What is another term for income elasticity of demand?

  YEd
• Why do businesses use income elasticity of demand?

  To estimate demand changes with income changes
• How does consumer income affect demand?

  As income changes, demand also changes
• What can businesses measure using income elasticity of demand?

  Impact of income changes on product demand
• What are the types of goods based on income elasticity of demand?

  • Normal goods
  • Inferior goods
  • Luxury goods
• What are normal goods?

  Goods whose demand increases with income
• What is the YED value for normal goods?

  Positive value greater than 0
• What are inferior goods?

  Goods where demand decreases as income increases
• What is the YED value for inferior goods?

  Negative value less than 0
• Give an example of an inferior good.

  Clothes from charity shops
• What is a luxury good?

  Goods with larger demand increase as income rises
• What is the YED value for luxury goods?

  Positive value greater than 1
• If income increases by 10% and demand increases by 25%, what is the YED?

  $2.5$
• What is the formula for calculating YED?

  YED = % change in quantity demand / % change in income
• What are the YED values for different types of goods?

  • Inferior goods: YED < 0 (negative)
  • Normal necessities: 0 < YED < 1 (positive)
  • Luxury goods: YED > 1 (positive)
• What happens to demand when income increases for inferior goods?

  Demand decreases
• What happens to demand when income increases for normal necessities?

  Demand increases slightly
• What happens to demand when income increases for luxury goods?

  Demand increases significantly
• What factors affect price elasticity of demand?

  • Standards of living
  • Economic cycle
  • Type of good
  • Level of consumer income
  • Availability of substitutes
• How does the nature of the good affect income elasticity?

  Determines if it's a necessity or luxury
• How does the level of consumer income affect income elasticity?

  Poor consumers focus on necessities
• What happens to YED for necessities as consumers become wealthier?

  Moves towards zero as satisfaction increases
• How does the standard of living affect income elasticity?

  Wealthier countries have higher disposable incomes
• What happens during economic recovery regarding disposable income?

  Disposable income increases, spending rises
• What happens during an economic decline regarding spending?

  Spending shifts from luxury to necessities
• What is the relationship between economic cycles and consumer spending?

  • Recovery: Increased disposable income, more spending
  • Decline: Decreased disposable income, less spending