1.2.5 Income Elasticity Of Demand

Question 1

Calculation for income elasticity of demand

Answer 1

% Change in quantity demanded/% Change in income

Question 2

Inferior goods

Answer 2

As incomes of consumers rise inferior goods sales fall as people buy better quality products

Question 3

Normal goods

Answer 3

As incomes of consumers rise, demand rises for normal goods

Question 4

A negative YED value =

Answer 4

Inferior good

Question 5

Positive YED (0-1) value =

Answer 5

Normal necessity

Question 6

Positive YED (>1) value =

Answer 6

Normal luxury

Question 7

Difference between YED and PED

Answer 7

PED is always negative and YED can be either positive or negative

Question 8

Elasticity

Answer 8

Elasticity measures the responsiveness of demand to change in a relevant variable - such as price or income

Question 9

Difference between Luxury goods and Necessities

Answer 9

Both are normal goods but luxuries are bought more frequently when income rises whereas the opposite is true for necessities and vice versa