Income Elasticity of Demand (YED)

• The YED measures how much consumers are willing to spend on a product as their income increases or decreases.
• Income elasticity of demand is the responsiveness of quantity demanded to changes in income.
• What is the equation for YED?

  YED = (% change in Quantity Demand) / (% change in Income (Y)
• Normal goods are when YED > 0
• Inferior goods are when YED < 0
• For an inferior good, the demand curve is downward sloping.
• Examples of inferior goods

  • Own brand goods
  • Bus journeys
• 0<YED<1: Inelastic -> normal goods (e.g. apples)

  
• YED > 1: Elastic -> Luxury goods (e.g. designer goods)

  
• Relevance of YED to a business

  • As income changes (business cycles) -> Demand for goods change
  • Effects:
  • Advertising
  • Stock levels