1.2.3 Income Elasticity of Demand

Question 1

Define income elasticity of demand

Answer 1

Measures the responsiveness of quantity demanded to a change in income

Question 2

What is the formula for YED

Answer 2

%change in quantity demanded/ %change in income

Question 3

What is the value for perfectly inelastic YED

Answer 3

0

Question 4

What is the value for inelastic YED

Answer 4

<1

Question 5

What is the value for unitary YED

Answer 5

1

Question 6

What is the value for elastic YED

Answer 6

> 1

Question 7

What is the value for perfectly elastic YED

Answer 7

Infinity

Question 8

Define normal goods and give examples

Answer 8

As income increases, demand increases and visa versa
Eg clothes, mobile phones, cars, TV

Question 9

What is the YED value for normal goods

Answer 9

Positive between 0 and +1

Question 10

Define inferior goods, giving examples

Answer 10

As income rises, demand falls
Eg basic food products, value supermarket products, public transport

Question 11

What is the YED value for inferior goods

Answer 11

<0

Question 12

Define luxury goods, giving examples

Answer 12

Luxury goods will be very elastic in respect to income. A rise in income will lead to a more than proportionate increase in demand
Eg luxury holidays, designer clothing

Question 13

Explain the sales benefit of YED to firms

Answer 13

Firms need to know how their sales are to be affected by changes in the income of the population eg during a recession vs boom

Question 14

Explain the future demand benefit of YED to firms

Answer 14

Firms can estimate future demand for their goods/services once they know expectations on real income which can help with planning what products to produce

Question 15

Explain the product range benefit of YED to firms

Answer 15

Important for businesses to have a diversified product range - luxury products with a high income elasticity see greater sales volatility over a business cycle than necessities where demand is less sensitive to changes in income

Question 16

Explain the usefulness of YED to governments

Answer 16

If a government wishes to maximise tax revenue during an economic boom, it should place indirect taxes on those products whose demand is income elastic, meaning luxury goods

Question 17

Explain the limitations of YED data

Answer 17

• data may be unreliable
• data may change over time (as society becomes richer, more goods may be deemed normal but inelastic as easily affordable
• future real incomes may be difficult to predict due to changing economic conditions
• other factors may affect demand causing the expected relationship to not hold eg consumer trends against the product as real incomes rise