1.1.4 YED

Question 1

Income elasticity of demand

Answer 1

The responsiveness of demand to a change in income

Question 2

YED equation

Answer 2

YED = %change in quantity demanded/%change in income

Question 3

Necessities (-1<YED<1)

Answer 3

Basic goods that consumers need regardless of income level (water, clothing, food)

Question 4

Luxury goods (YED<-1, YED>1)

Answer 4

Goods that consumer buy if they can afford them

Question 5

Normal goods (YED = positive)

Answer 5

Goods that are bought when income increases (positive correlation)

Question 6

Inferior goods (YED = negative)

Answer 6

Goods that are bought when income decreases (inversely related)

Question 7

Significance of YED to businesses

Answer 7

• Can be used to make informed decisions (flexible resources)
• Can be used to take proactive measures: expectations of booms/recessions

Question 8

Significance of YED to the government

Answer 8

• Can place more indirect taxes on inelastic products to raise revenue
• Subsidies: to lower prices of certain goods/services