Theme 1.2 - Income Elasticity of Demand

Question 1

What does YED measure?

Answer 1

How responsive quantity demanded is to changes in income

Question 2

What is the YED equation?

Answer 2

%Change in Quantity Demanded/
%Change in Income

Question 3

What type of elasticity do values 0, >1, <1 and 1 correspond to?

Answer 3

0 - Perfectly Income Inelastic
>1 - Income Elastic
<1 - Unitary Elastic
1 - Income Inelastic

Question 4

Describe the elasticity of normal/necessary goods

Answer 4

Positive YED
When incomes rise, demand rises
When incomes fall, demand falls

Question 5

Describe the elasticity of inferior goods

Answer 5

Negative YED
Incomes rise, demand falls
Incomes fall, demand rises

Question 6

What is a superior good?

Answer 6

Normal good that is considered a luxury

Question 7

Describe the elasticity of superior goods

Answer 7

Income elastic, as change in demand > change in income
Incomes rise, demand rises
Incomes fall, demand falls

Question 8

What does sign infer about a good?

Answer 8

Quality
Normal + superior are positive (+)
Inferior are negative (-)

Question 9

What does size infer about a good?

Answer 9

Degree of elasticity
>1 - Elastic

Question 10

What are the uses of YED?

Answer 10

Firms can predict impacts of income change on demand
Business can plan ahead (E.g., cut output before recession)
Business can spread risk
Product switching becomes easier - Firm changes produce relative to consumer income

Question 11

How can a business use YED to spread risk?

Answer 11

Offering products at different price points
Appeals to different income levels

Question 12

What are the limitations of YED?

Answer 12

Values based off estimates
Difficult to forecast changes in demand
Information may become outdated
Elasticity changes over time
Other factors can cause shift in curve