2.5 Income Elasticity of Demand (YED)

Question 1

luxury goods

Answer 1

Luxury goods are products that are considered to be of higher quality and are typically more expensive than standard or basic goods. As income increases, the demand for luxury goods increases at a faster rate than for normal goods. With this, they’re demand is income elastic.

Question 2

necessity goods

Answer 2

Necessity goods are products or services that are essential for everyday living. These goods have few substitutes. Consumers will continue to buy them even if prices rise, although they may reduce consumption if prices increase substantially. They’re demand is income inelastic.

examples: Basic food items (e.g., bread, rice), Medicines and healthcare products, Utility services (e.g., water, electricity)

Question 3

normal goods

Answer 3

Normal goods are goods whose demand increases as consumer incomes rise, and decreases as consumer incomes fall, ceteris paribus. The relationship between income and demand for normal goods is positive (positive YED), meaning that when people have more income, they tend to purchase more of these goods.

Examples of normal goods include clothing, electronics, and dining out.

Question 4

inferior goods

Answer 4

Inferior goods are goods for whose demand decreases as consumer income rises as when people have more income, they tend to buy higher-quality goods, replacing inferior goods in their consumption. These goods are typically seen as lower-quality substitutes for more expensive alternatives. They are represented by a downwards sloping Engel curve, where the relationship between income and demand for inferior goods is negative (negative YED).

Examples include instant noodles, bus travel (instead of private cars), and generic store-brand products.

Question 5

income elasticity of demand (YED)

Answer 5

Income Elasticity of Demand (YED) measures the responsiveness of the quantity demanded of a good to a change in consumer income, calculated as the percentage change in quantity demanded divided by the percentage change in income. YED indicates whether a good is a normal good (YED > 0) or an inferior good (YED < 0).

formula: YED = percentage (%) change in Qd / the percentage (%) change in income

Question 6

services

Answer 6

Services are intangible economic products that cannot be touched, seen, or physically owned. They involve the provision of a skill, expertise, or experience to satisfy a consumer’s need or want. Unlike goods, services are consumed at the point of production. Examples include education, healthcare, banking, and entertainment.

Question 7

income

Answer 7

chat: Income is the flow of money or earnings received by individuals, households, or businesses, typically in exchange for labor, services, or investments. It includes wages, salaries, profits, interest, and rents, and is used to purchase goods and services or accumulate wealth.

Question 8

engel curve

Answer 8

an engel curve illustrates the ability and willingness to purchase different quantities of good X over a range of income, ceteris paribus.