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
• Interpretation of YED

  Interpretation:

  • Normal Goods: YED > 0, demand increases as income rises.
  • Inferior Goods: YED < 0, demand decreases as income rises.
  • Luxury Goods: YED > 1, demand increases more than proportionally as income rises.
• Advantages of YED

  Advantages: YED helps businesses forecast how changes in the economy (such as a recession or boom) will affect demand for their products. It is particularly useful for businesses selling luxury or inferior goods.
• Disadvantages of YED

  Limitations: YED is more difficult to predict in changing economic climates. Businesses may need to continuously monitor income trends and adjust strategies accordingly.
• Calculation and Interpretation of YED

  YED helps businesses understand how changes in consumer income affect the demand for their products. Positive YED values indicate increased demand as income rises, whereas negative YED values indicate that demand falls when income increases.