1.2.5 - Income Elasticity of Demand (YED)

Question 1

What is YED?

Answer 1

How change in income results in the change in demand

Question 2

What type of good is a product with a YED value of <0 and explain?

Answer 2

Inferior
- Demand rises when income falls (negative income elasticity)
- Public transport and canned foods

Question 3

What type of good is a product with a YED value of 0-1 and explain?

Answer 3

Necessity
- Demand not very responsive to change in income
- Staple items

Question 4

What type of good is a product with a YED value of >1 and explain?

Answer 4

Luxury
- Demand rises when income rises ext
- Demand is responsive to income so income elastic
- Cars, holidays and jewellery

Question 5

What does a product with a negative YED mean?

Answer 5

Considered an inferior good

Question 6

What does a product with a positive YED mean?

Answer 6

Normal goods so necessities or luxury

Question 7

YED formula

Answer 7

Change in demand / change in income

Question 8

What is YED?

Answer 8

How change in income results in the change in demand

Question 9

Factors influencing YED

Answer 9

1. Recession
   - Demand for inferior goods rises and luxury falls
2. Economic growth
   - Luxury increases and inferior decreases

Question 10

What is the significance of YED to a business?

Answer 10

Can help plan their production and products

Question 11

How can they production plan once they know YED?

Answer 11

• Help determine the amount of resources needed
• Can know whether to increase or decrease amounts
• Help financial planning
• Easier when YED is inelastic as consistent demand

Question 12

How can they product plan once they know YED?

Answer 12

• During a recession producers of inferior will have increased demand however when increased income will suffer
• Different products to prepare for this
  (Tesco finest and value range)