Income Elasticity of Demand

Question 1

What is Income Elasticity?

Answer 1

How customers react to a change in income

Question 2

What value is an inferior good?

Answer 2

A Negative Number

Question 3

What Value is a Normal Good?

Answer 3

Between 0-1

Question 4

What value is a luxury good?

Answer 4

Above 1

Question 5

How do you work out YED?

Answer 5

Percentage Change of Demand / Percentage Change in Income

Question 6

Luxury Good LOA? (5)

Answer 6

1. Business is vulnerable to a change in incomes
2. If there are high unemployment levels there will be a fall in incomes
3. Customers will switch to cheaper alternatives as it’s all they can afford
4. Leading to a fall in revenue and profits
5. Leading to sell Non Current Assets reducing Scale

Question 7

Normal Goods LOA? (5)

Answer 7

1. Selling normal goods will have normal and predictable sales
2. Due to demand not changing very much with a change in income
3. Unlikely to see a rise or fall in profits and make a loss
4. Likely to make loan repayments
5. Possibly allowing lower interest rates as business is more attractive to banks

Question 8

Inferior Good LOA? (4)

Answer 8

1. High Unemployment will make people have lower incomes and increase demand for inferior goods
2. Need to increase production due to an unexpected change in demand
3. Increase Gross profit
4. The flexibility will also help reduce production when incomes rise to help reduce operating expenses

Question 9

Spreading Risk LOA? (6)

Answer 9

1. If a business sells a combination of all goods?
2. They will have a balanced product portfolio
3. Less vulnerable to a change in incomes
4. Therefore if incomes change there will be consistent demand
5. Inflows in sales haven’t been dropped leading to a positive net cash flow
6. Able to pay bills