Income Elasticity of Demand (YED)

This measures how responsive demand is to changes in consumers’ incomes.

 

Income elasticity of demand = % change in quantity / % change in income

 

QPR will still help you, it is important to remember that Q (quantity) is still on top.

 

A good will have a YED of 3 if an increase of income of 5% leads to an increase in demand of 15%.  As this value is greater than one (it is a positive figure), we describe it as having income elastic demand, in other words, a percentage change in income leads to a larger percentage change in the quantity demanded.  Income elastic demand goods include luxury goods, for example, foreign holidays and expensive cars.

 

A good will have a YED of 0.5 if an increase in income of 5% leads to an increase in demand of 2.5%?  As the value is between 0 and 1, the good is described as being income inelastic demand.  Necessities often have income inelastic demand as people will buy a similar amount irrespective of income, for example, when given a pay rise people won’t spend more money on milk and bread because they are richer.

 

A good will have a YED of -2 if an increase in income of 5% leads to a decrease in demand of 10%?  The negative sign before the income elasticity value is of great importance.  The previous two examples both had positive values and they can be described as normal good, in other words, as income goes up demand will go up.  Negative income elasticity means the product is inferior; an increase in income will lead to a decrease in demand, for example, own brand goods and spam.

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