2.5 YED (income elasticity of demand) Flashcards
YED
Measure of the responsiveness of quantity demanded to changes in income for a good or service
calculation of YED
YED = % change in Qd of Good X / % change in income
to interpret YED
Interpretation of YED
1) Sign of YED
- Positive or Negative
- positive → normal goods
- negative → inferior goods
2) The absolute value of YED
- The bigger the value, the greater the change in Qd when income changes
YED of normal goods vs inferior goods
Normal vs Inferior
YED > 0
- Demand and income change in the **same”” direction
- normal goods
YED < 0
- Demand and income change in opposite direction
- inferior goods
YED of normal goods
YED > 0
YED of inferior goods
YED < 0
YED of necessities (normal goods)
0<YED<1
YED of luxury goods (normal goods)
YED>1
YED of necessities vs luxury goods (normal goods)
0<YED<1
- Income inelastic: people buy a little more if income increases
- necessities
YED>1
- Income elastic: people buy a lot more if income increases
- luxury goods
what if the YED is a negative number smaller than -1
income elastic inferior good
what if the YED: -1<YED<0
income inelastic inferior good
values of income elastic demand
< -1 or YED > 1
values of income inelastic demand
-1 < YED < 1
effect of economic growth on industries (normal goods vs inferior goods)
- Economic growth will affect the increase in demand for industries very differently
- Restaurants / Movies / Healthcare YYY
- Food / Clothing / Furniture / Housing Y
- grow a little bit compared to restaurants etc.
effect on recession on industries (normal goods vs inferior goods)
- On the other hand, if recession hits the economy
- Restaurants / Movies / Healthcare NNN
- Food / Clothing / Furniture / Housing N
- Second-hand clothing / Used-car YYY
