1.2.5 income elasticity of demand Flashcards
income elasticity of demand
the proportionate change in demand for a good following an initial proportionate change in consumers’ income
formula for yed
% change in quantity demanded / % change in income
what does yed depend on
whether the good is normal or inferior
yed is always negative for what type of product
inferior good
yed is always positive for what type of product
normal good
how can normal goods be divided ? with their elasticities
- superior goods/ luxury goods (+1)
- basic goods (0 - +1)
quantity demanded for a normal good rises more proportionately for what good ?
superior/luxury good
demand for what good rises at a slower rate than income ?
basic good
normal goods have a positive income elasticity of demand so as consumers’ income rises more is demanded at each price.
how is this shown on a demand curve…
outward shift of a demand curve
the income elasticity of demand for most types of food is what ?
low
how does knowledge of income elasticity of demand help firms ?
helps them predict the effect of an economic cycle on sales
how sensitive are luxury goods and necessities to economic cycles ?
luxury products with high income elasticity see greater sales volatility over the business cycle than necessities where demand from consumers is less sensitive to changes in the cycle
what is yed for normal necessaties
positive but less than 1
what is the YED like for normal luxury goods
positive and exceeding 1
giffen good
a product that people consume more of as the price rises and vice versa
