YED

• What does income elasticity of demand measure?

  Responsiveness of demand to income
• Income elasticity of demand is calculated by comparing two percentage changes
• Income elasticity of demand is shortened to IED.
• How is income elasticity of demand calculated?

  Percentage change in demand divided by percentage change in income
• In the example provided, income increased from £20,000 to £22,000, resulting in a percentage increase of 10%
• What was the percentage change in demand in the example given?

  20%
• A luxury product has an income elasticity of demand greater than one
• What happens to the demand for luxury products when income rises?

  Demand rises more than income
• Necessities have an income elasticity of demand less than one but greater than zero.
• When income rises, demand for necessities increases but by a smaller percentage
• Match the product type with its characteristic income elasticity of demand:

  Luxury product ↔️ Greater than one

  Necessity ↔️ Less than one but greater than zero

  Inferior good ↔️ Negative
• What is an inferior good?

  A good with negative income elasticity
• As income rises, demand for inferior goods decreases
• During a recession, demand for inferior goods may rise.
• Why do consumers switch to inferior goods during economic downturns?

  They become more affordable