1.8 Income Elasticity Of Demand

Question 1

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
- Changes in income result in changes to the demand for products
Businesses are interested in how much the quantity demanded will change for different products

Question 2

Calculation of YED

Answer 2

% change in quantity demanded/ % change in income

Question 3

Interpretation of numerical YED value

Answer 3

• The YED value can be positive or negative and the value is important in determining the type of good
  -> A good with a positive YED value is considered to be a normal good
  Normal goods can be classified as necessities or luxuries
  -> A good with a negative YED value is considered to be an inferior good

Question 4

Interpretation of numerical YED values: > 1

Answer 4

Type of good: Luxury -> Examples include cars, smart watches, foreign holidays, cinema visits, jewellery, and branded goods
. Explanation:
- Demand rises when income rises and demand falls when income falls
- Demand is responsive to a change in income (income elastic)

Question 5

Interpretation of numerical YED values: 0-1

Answer 5

Type of good: necessity-> Examples include staple food items such as bread, milk, eggs, and potatoes; fuel; toothpaste
Explanations:
- Demand is not very responsive to a change in income (income inelastic)

Question 6

Interpretation of numerical YED values: <0

Answer 6

Type of good: inferior -> Examples include public transport; domestic holidays; canned foods; unbranded/own label goods
Explanation:
. Demand rises when income falls (negative income elasticity)
. Demand falls when income rises

Question 7

Factors influencing YED -> economic factors

Answer 7

. During a recession, wages usually fall and demand for inferior goods rises while demand for luxury goods falls
. During a period of economic growth and rising wages, demand for luxury goods increases while demand for inferior goods decreases
. Other influences on income include minimum wage legislation, taxation and increased international trade

Question 8

Factors influencing YED -> nature of ta he good

Answer 8

Luxury or necessity (both are classified as normal goods)
Inferior or normal good

Question 9

Significance of YED to business -> production plannning

Answer 9

. A business needs to plan how much it is going to produce, which will help it determine the number of resources such as raw materials and labour it will need
. If a business can determine YED for its products and can accurately predict changes in income, then it can plan whether to increase or decrease production
. It can help managers with financial planning
Production planning is easier when YED is relatively inelastic, as demand is likely to be more constant

Question 10

Significance of YED to businesses -> product planning

Answer 10

. The economy goes through different stages over time, from recession to recovery and growth and so incomes will fluctuate
-> This is known as the Business Cycle
. During a recession, producers of inferior goods will benefit from higher demand but will lose out when incomes rise and consumers return to normal goods
. Some businesses might have different products in their product portfolio to take account of this

Question 11

Example of product plannning

Answer 11

E.g. During the 2008 recession, Waitrose introduced its ‘Essentials’ range of products to appeal to more budget conscious shoppers