income of elasticity of demand

• The Income elasticity of demand (YED) reveals how responsive the change in quantity demanded is to a change in income
• YED= % Chnage in QD/ % change in income
• • Necessity is between 0-1
  • Demand is not very responsive to a change in income (income inelastic)
• Luxury is more than 1

  • Demand rises when income rises and demand falls when income  falls
  • Demand is responsive to a change in income (income elastic)
  • Cars, smart watches, foreign holidays, cinema visits, jewellery, and branded goods
• inferior is less than 0

  • Demand rises when income falls (negative income elasticity)
  • Demand falls when income  rises
• factors influencing income elasticity of demand

  • During a recession wages usually fall and demand for inferior goods rises while demand for luxury goods falls
  • During a period of economic growth and rising wages, demand for luxury goods increases while demand for inferior goods decreases
  • Other influences on income include minimum wage legislation, taxation, increased international trade
• • If a business can determine YED for its products and can accurately predict changes in income then it can plan whether to increase or decrease production 
• Production planning is easier when YED is relatively inelastic as demand is likely to be more constant
• Understanding the income elasticity of demand is useful to businesses as it can help them plan their production and products
• product planning

  The economy goes through different stages over time from recession to recovery and growth and so incomes will fluctuate 

  • This is known as the Business Cycle 
• • product planning
  • During a recession producers of inferior goods will benefit from higher demand, but will lose out when incomes rise and consumers return to normal goods