1.2.5 Income elasticity of demand

Question 1

What is income elasticity of demand?

Answer 1

Measures the extent to which the quantity of a product demanded is affected by change in income

Question 2

What is the formula for income elasticity of demand?

Answer 2

% change in quantity demanded / % change in income

Question 3

If the value of YED is more than 1 what will the product/service and demand be?

Answer 3

Demand will be responsive
Product will be Luxury
(when income rises, demand will rise)

Question 4

If the value of YED is between 0 and 1 what will the product/service and demand be?

Answer 4

Demand will not be responsive
Product will be a necessity
(people will always buy)

Question 5

If the value of YED less than 0 what will the product/service be?

Answer 5

Demand will be responsive and negative income elasticity
The product will be inferior
(people will buy when income decreases)

Question 6

What is an inferior good?

Answer 6

A good where demand drops when people’s income rises as consumers can afford better alternatives

Question 7

How do factors in the economy influence YED?

Answer 7

They change the wages of workers eg. Recession- wages fall

Question 8

How does YED help businesses with production planning?

Answer 8

YED allows a business to plan how much it will it will produce to know the number of resources it will need

Question 9

How does YED help businesses with product planning?

Answer 9

The economy goes through different stages (recession and growth) so businesses may need to add products to their product portfolio

eg. In recession the demand for inferior products rise to business may introduce different products in their product portfolio like a finest and necessity range