Income Elasticity of Demand (YED)

Question 1

What does YED measure?

Answer 1

The responsiveness of quantity demanded to a change in income.

Question 2

What is the formula for YED?

Answer 2

YED = % Change in QD ÷ % Change in Income

(%ΔQD ÷ %ΔY)

Question 3

What does a positive YED mean?

Answer 3

It’s a normal good – as income rises, demand rises.

Question 4

What does a negative YED mean?

Answer 4

It’s an inferior good – as income rises, demand falls.

Question 5

What is an income elastic good? (YED > 1)

Answer 5

A luxury good – demand rises more than proportionately as income rises.

Question 6

What is an income inelastic good? (0 < YED < 1)

Answer 6

A necessity – demand rises less than proportionately as income rises.

Question 7

Y-axis

Answer 7

Income

Question 8

X-axis

Answer 8

Quantity demanded

Question 9

Inferior Goods (YED < 0):

Answer 9

Downward-sloping demand curve

As income increases, quantity demanded falls

Examples: Instant noodles, bus travel (for some)

Question 10

Normal Goods – Income Inelastic (0 < YED < 1):

Answer 10

Upward-sloping, but steep curve

As income increases, demand increases less than proportionately

Examples: Bread, toothpaste

Question 11

Normal Goods – Income Elastic (YED > 1):

Answer 11

Upward-sloping, but shallow/flatter curve

As income increases, demand increases more than proportionately

Examples: Luxury holidays, designer clothes