1.2.5 - YED

Question 1

What is Income Elasticity of Demand

Answer 1

the Responsiveness of Demand to a Change in Income

Question 2

Explain YED in relation to Normal (Neccesity) Goods

Answer 2

• those for Demand Increases when Income Increases
• a Good is Normal when Consumer Demand More As their Income Increase
• YED would be Positive > 0 (Positive)

Question 3

Explain YED in relation to Inferior Goods

Answer 3

• products where Demand Decreases as Income Increases
• YED value will be < 0 (Negative)
• e.g. Charity Shop Clothes might have YED of -1.5

Question 4

Explain YED in relation to Luxury Goods

Answer 4

• when an Increase in Income Causes a Larger Increase in Demand
• YED Value for Luxury Goods will be > 1 (Positive)

Question 5

What is the YED Formula

Answer 5

% Change in Quantity Demanded / Change in Income

Question 6

How do you Calculate % Change in Price or Quantity Demanded ?

Answer 6

(Price New - Price Old / Price Old) x100

Question 7

Explain Factors Influencing YED - Luxury Goods

Answer 7

• Increase in Income will mean an Increase in Demand for Luxury Goods
• e.g. if I had a payrise, I might consider buying a Watch

Question 8

Explain Factors Influencing YED - Normal Goods

Answer 8

• Increase in Income will Lead to an Increase Demand
• e.g. I’m Earning More Because the Minimum Wage has Increase this Year, so I’ll Buy more of the Products I need

Question 9

Explain Factors Influencing YED - Inferior Goods

Answer 9

Increase in Income lead to a Fall in Demand for Inferior Goods

Question 10

4 Reasons Why Income Changes

Answer 10

• Income will Fall if Employees Lose their Jobs and end up Claiming Jobseekers
• Income will Fall in times of Recession - Businesses may Need to Cut Costs (Staff Wages)
• Income will Rise if an Employee is Promoted Within a Business
• Incomes may Rise in Times of Economic Growth - Businesses may Want to Keep Key Staff with a Pay Rise

Question 11

Explain Significance of YED to Businesses selling goods with High YED

Answer 11

• Demand for Goods that are Sensitive to Changes in YED is often Cyclical
• means When the Economy is Growing, Demand for these Types of Goods, e.g. restaurants, luxury goods, is also Growing
• But when Ecnomony Falls into Recession, Demand also Falls -> can Cause Difficulties -> may have to Lay Off Workers or Cancel Projects

Question 12

Explain Significance of YED to Businesses selling goods with Low YED

Answer 12

• Demand for Goods that are Income Inelastic Tends to be More Stable During the Different Phases in the Business Cycle
• Makes Production Planning and Investment Decisions a Little Easier