2.2.4 income elasticity of demand (YED)

Question 1

What is income elasticity of demand?

Answer 1

The responsiveness of a change in demand to a change in income.

Question 2

What is the formula for YED?

Answer 2

% change in quantity demanded / % change in income

Question 3

What happens to demand for luxury products during economic growth?

Answer 3

It is likely to increase, whilst demand for inferior goods is likely to fall. This is because economic growth causes a general rise in disposable income.

Question 4

What are inferior goods?

Answer 4

Goods that see a fall in demand as income increases.

Question 5

What is the YED for an inferior good?

Answer 5

< 0.

Question 6

What is an example of inferior goods?

Answer 6

The ‘value’ options at supermarkets can be seen as inferior, as consumers switch to branded goods as income rises.

Question 7

What is the YED of a normal necessary good?

Answer 7

> 0.

Question 8

What does a value of YED between 0 and 1 indicate?

Answer 8

That demand only increases by a smaller proportion than the increase in income, which is income inelastic.

Question 9

When does demand for normal luxury goods increase?

Answer 9

When there is an increase in income as people are more able to afford.

Question 10

What is the YED of a normal luxury good?

Answer 10

> 1.