Income elasticity of demand (YED)

Question 1

What is Income elasticity of demand (YED)?

Answer 1

A measure of the responsiveness of change in quantity demanded to a change in income.

Question 2

What is the formula for YED?

Answer 2

YED = % change in quantity demanded divided by % change in income

Question 3

What is a luxury good?

Give examples

Answer 3

A good with a YED value greater than 1

Examples:
- Smart watches
- Cinema trips
- Jewellery
- Branded goods

Demand rises when income rises and demand falls when income falls

Demand is responsive to a change in income (income elastic)

Question 4

What is a necessity good?

Give examples

Answer 4

A good with a YED value of 0-1

Examples:
- bread
- milk
- eggs
- fuel
- Toothpaste

Demand is not very responsive to a change in income (income inelastic)

Question 5

What is an inferior good?

Give examples

Answer 5

A good with a YED value that is less than 0

Examples:
- Public transport
- Domestic foods
- Canned food/ unbranded
- Own label goods

Demand rises when income falls (negative income elasticity)

Demand falls when income rises