Income elasticity of demand

• What does income elasticity of demand measure?

  Responsiveness of demand to income changes
• How is income elasticity of demand abbreviated?

  It is abbreviated as YED
• What is the formula for income elasticity of demand?

  Percentage change in quantity demanded / percentage change in income
• If incomes increase by 20% and quantity demanded increases by 40%, what is the YED?

  +2
• What does a YED coefficient between 0 and 1 indicate?

  It indicates a normal good
• What does a YED coefficient higher than 1 indicate?

  It indicates a luxury good
• What does a negative YED coefficient indicate?

  It indicates an inferior good
• What happens to quantity demanded if incomes fall and YED is +3?

  Quantity demanded likely falls by 30%
• If a business forecasts a recession, what might it need to do?

  Reduce inventory and workforce
• Why is it important to know YED?

  To forecast demand changes during economic shifts
• How does a positive YED affect business decisions during a recession?

  It may lead to reduced stock and staff
• What financial actions might a business consider during a downturn?

  Securing loans or issuing equity
• What does a YED of -2 indicate?

  Negative correlation, inferior good
• What is the significance of estimating YED?

  It helps predict future demand trends
• If a product has a YED of +3 and incomes fall by 10%, what is the expected change in quantity demanded?

  It will fall by 30%
• How does understanding YED assist in inventory management?

  It informs stock levels based on demand forecasts
• What is the relationship between YED and economic conditions?

  YED indicates how demand changes with income fluctuations