3.2 Income Elasticity of Demand (YED) Flashcards
What is the formula for calculating income elasticity of demand (YED)?
% change in quantity demanded / % change in real income
What does income elasticity of demand (YED) show?
How responsive the demand for a product is to a change in (real) income
If % change in income is 50% and % change in demand is 25%, what is the YED?
0.5
What is considered a normal good in terms of YED?
A product with a positive income elasticity (YED > 0)
What characterizes luxury goods in terms of YED?
Income elasticity greater than +1 (YED > +1)
What are normal necessities characterized by in terms of YED?
Income elasticity > 0 and < +1
What defines inferior products in terms of YED?
Negative income elasticity (YED < 0)
What happens to the demand for inferior goods during economic growth?
Demand for inferior goods will fall
What happens to the demand for inferior goods during a recession?
Demand for inferior goods will rise
What is an example of an inferior good based on the text?
Tobacco
What is the significance of YED for firms?
It helps estimate how demand for products will change following a change in incomes
What does a high YED indicate for firms during rising average incomes?
Firms should focus on producing goods with high YED values (greater than 1)
Why might a firm worry if all its products had high, positive income elasticities?
The business would be vulnerable to a recession, suffering sharp falls in demand
Fill in the blank: Normal goods have a positive YED, i.e. YED ______.
> 0
Fill in the blank: Inferior goods have a negative YED, i.e. YED ______.
< 0
What is the average weekly household expenditure on cigarettes for the highest ten percent income group?
£2.30
What is the average weekly household expenditure on cigarettes for the lowest ten percent income group?
£2.50
True or False: Normal luxuries have a low but positive income elasticity.
False
What does a positive YED indicate about a product’s demand when income increases?
More of the good is demanded
What does it mean if a product is categorized as a normal necessity?
It has a low but positive income elasticity
What is a characteristic of normal luxuries?
High and positive income elasticity
What can firms forecast using YED when governments change tax rates?
How demand for their goods would be affected due to changes in disposable incomes
