2.5 - Income Elasticity of Demand

Question 1

What does income elasticity of demand (YED) measure?

Answer 1

It measures how demand for a product changes as incomes change.

Question 2

What is the formula for YED?

Answer 2

YED = % change in quantity demanded ÷ % change in income.

Question 3

How does a nation’s average income typically change during economic growth and economic decline?

Answer 3

It increases during economic growth and decreases during economic decline (recession).

Question 4

What is the income elasticity of demand for normal products?

Answer 4

Normal products have a positive income elasticity of demand:

Necessities: Positive YED less than 1 (demand rises slower than income).

Luxuries: Positive YED greater than 1 (demand rises faster than income).

Question 5

What is the income elasticity of demand for inferior products?

Answer 5

Inferior products have a negative income elasticity of demand:

Demand decreases when income rises and increases when income falls.

Question 6

Give an example of a product with negative income elasticity of demand.

Answer 6

Cheaper value brands, like a supermarket’s budget baked beans.

Question 7

How can price elasticity help a business make pricing decisions?

Answer 7

For price-elastic products, businesses may set low, competitive prices to increase revenue.

For price-inelastic products, businesses can use high prices and price-skimming strategies to increase revenue.

Question 8

How can income elasticity help a business during economic growth or recession?

Answer 8

During economic growth, businesses focus on promoting luxury products with positive income elasticity.

During a recession, businesses focus on promoting inferior products with negative income elasticity.

Question 9

What pricing and marketing strategies should be used for a product with a price elasticity of -3.0 and an income elasticity of -0.5 (e.g., value tomato soup)?

Answer 9

1. Reduce price to increase demand, but ensure profit margins are sufficient.
2. During economic growth, reposition the product to appeal to wealthier customers.
3. During a recession, expect increased demand.

Question 10

What strategies should be used for a product with a price elasticity of -0.4 and an income elasticity of +1.5 (e.g., designer kitchens)?

Answer 10

1. Increase price as demand is price inelastic, leading to higher revenue.
2. During economic growth, focus on maintaining an aspirational brand image.
3. During a recession, offer incentives like discounts or instalment payment options.

Question 11

How might a business like Sainsbury’s adjust its marketing strategy based on changes in customer income?

Answer 11

During low-income periods, promote inferior products like Sainsbury’s Basics.

During higher-income periods, promote luxury products like Sainsbury’s Taste The Difference range.