Income elasticity of demand (YED)

Question 1

YED (income elasticity of demand) can be defined as…

Answer 1

the measure of the degree of responsiveness of the demand of a product to changes in consumer’s income

Question 2

How is YED calculated

Answer 2

by dividing the percentage change in q.d by the % change in consumer’s income

Question 3

YED formula

Answer 3

%∆ in QD
____________
%∆ in income

Question 4

Why is YED calculated?

Answer 4

in order to determine whether a good is normal or inferior

Question 5

What relationship does a normal good have?

Answer 5

A positive relationship between income and demand, thus a + YED value

Question 6

An increase in income…

Answer 6

increase in demand for a normal good and an outward shift of the demand curve

Question 7

A decrease in income…

Answer 7

decrease in demand for a normal good and an inward shift on the demand curve

Question 8

What relationship does an inferior good have?
(When your income increase you buy better quality goods and so buy less of the low-quality goods)

Answer 8

An inverse relationship between income and demand hence a - YED value, this means that an increase in income (Y) would lead to a decrease in demand for a inferior good and an inward shift on the demand curve

Question 9

Inferior good- a decrease in income…

Answer 9

Leads to an increase in demand for an inferior good and is shown by an outward shift in its demand curve

Question 10

Why is YED calculated (2)

Answer 10

To determine the impact of a change in income on the demand for a g/s
To determine whether a good is normal or inferior

Question 11

If a %∆ in consumer’s income leads to a more than proportionate %∆ in demand

Answer 11

the g/s is said to be income elastic in demand where 1<YED<∞

Question 12

When a YED value for a good is 0<YED<1,

Answer 12

the good is said to be income inelastic in demand

Question 13

What does income inelastic in demand mean

Answer 13

A %∆ in consumers income leads to a less than proportionate change in demand for the good

Question 14

When the YED value for a good= 1

Answer 14

the good is said to have unitary elasticity

Question 15

What does unitary elasticity mean

Answer 15

that the %∆ in demand for a good is proportionate to the %∆ in consumers income

Question 16

example YED= -5

Answer 16

This good can be described as an inferior good as it has a negative YED value. The good can also be categorized as relatively income elastic as the YED value is more than 1 (YED>1) this means that a %∆ in consumer’s income will result in a more than proportionate %∆ in demand for the good.
Example: A 10% increase in consumers income will result in a 50% (5x10) decrease in demand for the good, shown by an inward shift on the demand curve and vice versa with a 10% decrease in consumers income will result in a 50% increase in demand for the good, graphically shown by an outward shift of the demand curve

Question 17

YED= + 0.8

Answer 17

Classified as a normal good as it has a positive YED value. The good can be classsified as income inelastic in demand as the YED value is more than 0 but less than 1 (0<YED<1). This means that a %∆ in consumers income will result in a less than proportionate %∆ in demand.
Ex. a 10% increase in consumer’s income will result in a 8% increase in demand for the good, shown by an outward shift on the demand curve.
A 10% decrease would in consumer’s income will result in a 8% decrease in demand for the good, shown by an inwards shift of the demand curve