3.2 - Elasticities - Income elasticity of demand

Question 1

Income elasticity of demand

Answer 1

A measure of the responsiveness of demand to changes in income and involves demand curve shifts

Question 2

YED

Answer 2

percentage change in quantity demanded of good x/ percentage change in income.

Question 3

YED>0

Answer 3

A positive income elasticity of demand indicates that the good in question is normal; demand for the good and income change in the same direction (both increase or both decrease)

Question 4

YED<0

Answer 4

A negative income elasticity of demand indicates that the good is inferior; demand for the good and income change in opposite directions

Question 5

YED<1

Answer 5

Necessities. If a good has an YED that is positive and greater than one, it has income inelastic demand: A percentage increase in income produces a smaller percentage increase in quantity demanded.

Question 6

YED>1

Answer 6

Luxuries and services. If a good has an YED that is negative and less than one, it has income elastic: A percentage increase in income produces a larger precentage increase in quantity demanded.