1.2.5 Income elasticity of demand (YED)

Question 1

income elasticity of demand (YED)

Answer 1

-measure of the responsiveness of demand to changes in income

Question 2

income elastic

Answer 2

change in income = big change in demand

Question 3

income inelastic

Answer 3

change in income = small change in demand

Question 4

income elasticity

Answer 4

% change in quantity demanded divided by % change in income

Question 5

normal goods YED

Answer 5

income rises = rise in demand

0.1 -1.5

Question 6

elasticity/extent of change

Answer 6

• vary depending on product type

- inferior as income rises demand falls

Question 7

luxury goods YED

Answer 7

> 1.5

Question 8

inferior good YED

Answer 8

negative YED

Question 9

factors that influence YED

Answer 9

1. current income level
2. nature of good/type of product
3. standards of living
4. economic cycle
5. taxes

Question 10

recession and luxury product

Answer 10

• sparkling wine decrease 2.3% in sales champagne 10%
• both luxury but are substitute for each other
• champagne more luxury YED = 3.2, sparkling wine 1.3

Question 11

significance of YED on businesses

Answer 11

1. consumers incomes rise = business want to produce normal goods
2. producing inferior goods may protect from recession
3. retailers use YED to plan sales and sell own brand goods in recession
4. incomes rising business may see incomes rising = expect rise in demand for goods and vice versa