1.2.5 Income elasticity of demand (YED) Flashcards
(10 cards)
What is income elasticity of demand (YED)?
It is how responsive the change in quantity demanded is to a change in income.
What is the formula for income elasticity of demand (YED)?
% change in quantity demanded ÷ % change in income
What is a good with a positive YED considered to be?
A normal good.
What is a good with a negative YED considered to be?
An inferior good.
What is the income elasticity of demand (YED) on a luxury good?
- Demand rises when income rises and demand falls when income falls.
- Demand is responsive to a change in income (income elastic).
- A good is luxury when the YED value is more than 1.
What is the income elasticity of demand (YED) on a necessity good?
- Demand is not very responsive to a change in income (income inelastic).
- A good is a necessity when the YED value is between 0 and 1.
What is the income elasticity of demand (YED) on an inferior good?
- Demand rises when income falls (negative income elasticity), and demand falls when income rises.
- A good is inferior when the YED value is less than 0.
What factors in an economy influence YED?
- During a recession, wages usually fall and demand for inferior goods rises while demand for luxury goods falls.
- During a period of economic growth, wages usually rise and demand for luxury goods increases while demand for inferior goods falls.
- Minimum wage legislation.
- Taxation.
- Increased international trade.
What is the significance of YED to businesses?
It is useful for businesses as it can help them plan their production and products. This will help them to generate higher profits and have less exposure to downturns in the economy.
How can YED help a business in production planning?
If a business can determine income elasticity of demand 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.
