14) Income Elasticity Of Demand

Question 0

Whats the YED formula

Answer 0

%

Question 1

What does YED mean

Answer 1

⚫️responsiveness
➡️to a quantity demanded
➡️to a change in income

Question 2

Interpret the value of YED its negative

Answer 2

⚫️inferior good
➡️as income rises
➡️we reduce our spending on it

Question 3

Interpret the value of YED when its positive

Answer 3

➡️normal good
➡️two types

⚫️luxury goods
➡️yed greater than one
➡️income elastic
➡️demand increases by a greater proportion than increase in income

⚫️necessity goods
➡️YED between 0 - 1
➡️income inelastic
➡️demand increases by smaller proportion than increase in income

Question 4

➡️if the income rises by 5%
➡️the sales of a product increases from 20,000 units a week, to 22,000 units
⚫️whats the YED
⚫️interpret your answer

Answer 4

Percentage change if QD
22,000-20,000=2,000
2,000➗20,000=0.1
0.1 x 100 = 10%

Percentage change of income price=5%

⚫️YED=10%➗5% = 2

⚫️YED for the good 
➡️positive
➡️greater than one 
➡️for every 1% change for the income
➡️quantity demanded increases by 2% 
➡️luxury good