1.2.5 YED

Question 1

What is income elasticity of demand?

Answer 1

The Income elasticity of demand (YED) reveals how responsive the change in quantity demanded is to a change in income

Question 2

How can YED be calculated?

Answer 2

% change in quantity demanded
———————————————– x 100 = YED
% change in income

Question 3

What does YED of >1 mean?

Answer 3

This good is luxury. This means that demand rises when income rises and vice versa, examples of these are cars, smart watches and branded goods.

Question 4

What does YED of 0-1 mean?

Answer 4

The good is a necessity. Demand is not responsive to a change in income, examples of these are staple food items such as bread, milk and eggs.

Question 5

What does the YED of <0 mean?

Answer 5

The good is inferior. Demand rises when incomes fall and demand falls when incomes rise. Examples of these are public transport, domestic holidays and canned foods/unbranded goods.

Question 6

Factors that influence YED?

Answer 6

/ During a recession wages usually fall and demand for inferior good rises and luxury goods decrease
/ During a period of economic growth luxury goods will rise and inferior will fall
/ Minimum wage legalisation
/ Taxation
/ Increased international trade

Question 7

Signifigance of YED to a business?

Answer 7

Understanding the income elasticity of demand is useful to businesses as it can help them plan their production and products