1.2.5 YED Income elasticity of demand

Question 1

Income elasticity of demand

Answer 1

measures the relationship between a change in quantity demanded for good X and a change in real income

Question 2

formula for calculating income elasticity

Answer 2

% change in demand divided by the % change in income

Question 3

Normal necessities

Answer 3

income elasticity of demand of between 0 and +1
Demand is rising less than proportionately to income

Question 4

Luxury goods and services

Answer 4

income elasticity of demand > +1 i.e. demand rises more than proportionate to a change in income - as income grows, more is soent on luxuries

Question 5

inferior goods

Answer 5

negative income elasticity of demand, meaning that demand falls as income rises. Typically inferior goods or services tend to exist where superior goods are available if the consumer has the money to be able to buy it. Consumers switch to better alternatives
Substitute products become affordable

Question 6

The income elasticity of demand is usually strongly positive for examples

Answer 6

Fine wines and spirits, high quality chocolates (e.g. Lindt) and luxury holidays overseas
Consumer durables - audio visual equipment, 3G mobile phones and designer kitchens
Sports and leisure facilities (including gym membership and sports clubs)

Question 7

income elasticity of demand is lower for examples

Answer 7

Staple food products such as bread, vegetables and frozen foods
Mass transport (bus and rail)
Beer and takeaway pizza!
Income elasticity of demand is negative (inferior) for cigarettes and urban bus services