income elasticity of demand

• Income elasticity of demand (YED)

  Shows the responsiveness of demand for a product to a change in real income
• Types of income elasticity

  • Normal goods (positive YED)
  • Luxury goods (YED > 1)
  • Necessities (0 < YED < 1)
  • Inferior products (negative YED)
• Normal goods


  • They have a positive YED
• Luxury goods


  • They have a YED > 1
• Necessities


  • They have a 0 < YED < 1
• Inferior products


  • They have a negative YED
• If YED is positive


  The product is a normal good, meaning more of the good is demanded following an increase in income
• Normal necessities


  • They have a low but positive YED (e.g. milk and fruits)
• Normal luxuries


  • They have a high and positive YED (e.g. higher end products)
• What is considered a necessity and a luxury is contextual and depends on the circumstances of the consumer
• If YED is negative

  The product is an inferior good, meaning less of the good is consumed following an increase in income
• When real incomes are rising during a period of economic growth

  The demand for inferior goods will fall causing an inward shift of the demand curve
• When real incomes are falling during a recession or if wages are rising slower than prices


  The demand for inferior goods will rise causing an outward shift of the demand curve
• Inferior goods


  They are sometimes called counter-cyclical products
• Inferior goods


  • Own label discounters
  • Urban bus transport
  • Cigarettes
  • Economy class travel