Income elasticity of demand

• What is the abbreviated form of income elasticity of demand?

  YED
• What is the income elasticty of demand?

  A measure of the responsiveness of quantity demanded of a product to a change in real income
• What is the formula for the income elasticity of demand?

  Percentage change in quantity demanded/percentage change in real income
• What does a positive sign in the income elasticty of demand mean?

  It indicates that the product is a normal good, so a rise in real income will cause an increase in demand
• What does a negative sign in the income elasticty of demand mean?

  It indicates that the product is an inferior good, so a rise in real income will cause a decrease in demand
• Why is YED useful for firms?

  If firms know demand for their products is income elastic, than they know revenue will increase during economic growth, but it will decrease during recessions - therefore, it is important for making investment decisions
• Why is YED useful for the government?

  If the government wants to maximise and estimate tax revenue during an economic boom, it will do so on products whose demand is income inelastic