Economics - 1.2.6b - Income Elasticity of Demand Flashcards
what is the formula for YED
% change in quantity demanded / % change in income
what is the formula for % change in price
new price - old price / old price X 100
what is the significance of YED
as consumers income changes so does demand so businesses can measure how much demand for a product or service will be affected by a change in consumers income
what are normal goods
goods which consumer demand and income increases
normal goods are demanded more as consumer income rises
what are the values of YED
positive result = normal product
negative result = inferior product
positive result and greater than 1 = superior product
how do Luxury goods influence the level of YED
increase in income means increase in demand for luxury goods
eg pay rise means people by a watch
how do necessity goods influence the level of YED
increase in income will lead to increase in demand
eg increase in minimum wage means people can buy more of necessities
how do inferior goods influence the level of YED
demand for inferior goods falls as income rises
pay rises means less smart price goods purchased
why do incomes sometimes fall
incomes fall if people lose their jobs and claim benefits
incomes fall in times of recession as businesses may cut costs
why do incomes sometimes rise
incomes rise if an employee is promoted within a business
incomes rise in times of economic growth as businesses want to keep key staff with a pay rise
what is the significance of YED to firms
used to help firms decide what products and services they should offer to increase sales
Eg poundland offer inferior goods with a negative YED so they do well during a recession as they offer cheap products for people
eg asda may need to diversify into premium goods during economic growth and incomes rise
what is the significance of YED for governments
interested for taxation who impose it on goods if theyre a normal good through VAT
impose tax on inferior goods through restricting taxation eg bus travel
