3.2 Income Elasticity of Demand

Question 1

What is the definition of income elasticity of demand

Answer 1

YED measures the responsiveness of the quantity demanded of a good to a change in consumer income.

Question 2

What factors affect YED

Answer 2

1. level of income
2. Degree of necessity of the good

Question 3

What are some uses of YED to producers.

Answer 3

1. income rising = stock up more goods with high YED. YED allows firms to determine how much stock to increase (if YED=1.2, income increase by 10%, demand will increase by 12%. Hence, firms can increase stock by 12%)
2. income falling = stock up more goods with low YED. YED allows firms to determine how much stock to decrease (if YED=1.2, income decrease by 10%, demand will decrease by 12%. Hence, firms can increase stock by 12%)

Question 4

What are some limitations to using YED?

Answer 4

1. Change in income may be temporary
2. Economy may be nearing or at full employment.
3. It is difficult to obtain YED data and YED may change over time.