1.2.5 Income Elasticity of Demand

Question 1

What is Income Elasticity of Demand (YED)?

Answer 1

Income Elasticity of Demand (YED) measures how much the demand for a good changes with a change in income

Question 2

What is the Income Elasticity of Demand (YED) equation?

Answer 2

YED = Percentage change in quantity demanded of a good / Percentage change in income

YED = %△Qd / %△Y

Question 3

What happens if there’s an increase income?

Answer 3

1. A fall in demand for inferior goods
2. A small rise in demand for income inelastic goods
3. A bigger % rise in demand for income elastic ‘luxury’ goods

Question 4

What goods have a positive income elasticity of demand?

Answer 4

Necessity goods have a positive income elasticity of demand

Question 5

What goods have a negative income elasticity of demand?

Answer 5

Inferior goods have a negative income elasticity of demand

Question 6

What is a Normal Good (for YED)?

Answer 6

When income increases, demand for the good also increases

Note: Normal goods will always have a positive income elasticity of demand i.e. a + sign

Question 7

What is an inferior good (for YED)?

Answer 7

When incomes increase, demand for the good would decrease

Note: Inferior goods will always have a negative income elasticity of demand i.e. a – sign

Question 8

What is the Income Elasticity of Demand (YED) determined by?

Answer 8

1. Whether the good is a necessity or luxury

2. The level of income of a consumer

Question 9

How does demand and income change when it is income inelastic?

Answer 9

Demand changes at a lower proportion than the change in income when being income inelastic.

Question 10

How does demand and income change when it is income elastic?

Answer 10

Demand changes at a higher proportion than the change in income when being income elastic