1.2.4 Income Elasticity of Demand

• What happens to the IED of necessities as income levels rise?

  Decreases
• IED is used by businesses to forecast demand and set pricing strategies.
• Income Elasticity of Demand (IED) measures how sensitive the quantity demanded of a good or service is to changes in consumer income
• The formula for calculating IED is: % Change in Quantity Demanded / % Change in Income
• Match the type of good with its IED value:

  Normal Goods ↔️ Positive

  Inferior Goods ↔️ Negative

  Luxury Goods ↔️ Greater than 1
• What happens to the demand for normal goods as income rises?

  Demand increases
• The demand for inferior goods decreases as income rises
• Luxury goods have an IED value greater than 1.
• What does the "% Change in Quantity Demanded" refer to in the IED formula?

  Change in consumer purchases
• The "% Change in Income" in the IED formula measures the change in the consumer's income
• An IED of 1.5 indicates a luxury good because demand increases more than proportionally with income.
• Normal goods have a positive IED value because their demand increases as income rises
• What is the IED value for inferior goods?

  Negative
• Luxury goods are characterized by demand increasing more than proportionally with income.
• Match the good with its IED description:

  Normal Goods ↔️ Demand increases as income rises

  Inferior Goods ↔️ Demand decreases as income rises

  Luxury Goods ↔️ Demand increases more than proportionally with income
• What is the IED value for normal goods?

  Positive
• Inferior goods have a negative IED value because their demand decreases as income rises
• The income effect for normal goods is that demand decreases with rising income.

  False
• Match the type of good with its example:

  Normal Goods ↔️ Branded clothing

  Inferior Goods ↔️ Second-hand clothing
• Why is branded clothing considered a normal good?

  Demand increases with income
• Interpreting IED values helps determine the type of good and its sensitivity to changes in income
• Fresh produce is an example of a normal good.
• What is an example of a luxury good with an IED greater than 1?

  High-end cars
• What does a positive IED value indicate about a good?

  It is a normal good
• Demand for inferior goods decreases as income rises
• An IED value of 1.5 for high-end cars suggests it's a luxury good.
• What is the IED value for normal goods?

  Positive
• Inferior goods have a negative IED value.
• Provide an example of a normal good.

  Brand-name clothing
• Second-hand clothes are an example of inferior goods.
• The nature of the good affects its IED.
• How does the availability of substitutes affect IED?

  Increases IED
• The level of income and its distribution can influence IED.
• Match the factor affecting IED with its effect:

  Nature of the good ↔️ Necessities have low IED, luxuries have high IED

  Consumer preferences ↔️ Changes can increase or decrease IED