income elasticity of demand

• What is real income?

  Spending power of money
• How do you calculate real income?

  Raw income minus taxes and contributions
• What does elasticity measure?

  Responsiveness of one variable to another
• What does YED stand for?

  Income elasticity of demand
• What does YED measure?

  Change in demand due to real income change
• How is YED calculated?

  Percentage change in demand over income change
• How does YED relate to price elasticity of demand?

  Similar structure but focuses on income
• If demand increases by 50% and income by 100%, what is YED?

  0.5
• How do you calculate percentage change in demand?

  (New quantity - Old quantity) / Old quantity
• What is the percentage change in demand if it increases from 2 to 4 units?

  100%
• How do you calculate percentage change in real income?

  (New income - Old income) / Old income
• What is the percentage change in real income if it increases from £100 to £400?

  300%
• What does a YED greater than 1 indicate?

  Demand changes more than income
• What are normal goods?

  Goods with positive income elasticity
• What happens to demand for normal goods as income increases?

  Demand increases as income increases
• What does a YED equal to 1 indicate?

  Proportional change in demand and income
• What happens to demand for inferior goods as income rises?

  Demand decreases as income increases
• What are the classifications of goods based on YED?

  • Normal goods: Positive YED
  • Superior goods: YED > 1
  • Inelastic goods: YED < 1
  • Unitary goods: YED = 1
  • Inferior goods: Negative YED
• How does income elasticity of demand affect consumer behavior?

  • Normal goods: Demand increases with income
  • Inferior goods: Demand decreases with income
  • Superior goods: Demand increases more than income
  • Inelastic goods: Demand increases less than income
• What is the relationship between income and demand for normal goods?

  • As income increases, demand increases
  • Positive correlation between income and demand
  • Upward sloping demand curve
• What is the relationship between income and demand for inferior goods?

  • As income increases, demand decreases
  • Negative correlation between income and demand
  • Downward sloping demand curve
• What is the significance of YED in economics?

  • Measures responsiveness of demand to income changes
  • Helps classify goods as normal or inferior
  • Aids in predicting consumer behavior