3.2 Income Elasticity of Demand (YED)

Question 1

What is the formula for calculating income elasticity of demand (YED)?

Answer 1

% change in quantity demanded / % change in real income

Question 2

What does income elasticity of demand (YED) show?

Answer 2

How responsive the demand for a product is to a change in (real) income

Question 3

If % change in income is 50% and % change in demand is 25%, what is the YED?

Answer 3

0.5

Question 4

What is considered a normal good in terms of YED?

Answer 4

A product with a positive income elasticity (YED > 0)

Question 5

What characterizes luxury goods in terms of YED?

Answer 5

Income elasticity greater than +1 (YED > +1)

Question 6

What are normal necessities characterized by in terms of YED?

Answer 6

Income elasticity > 0 and < +1

Question 7

What defines inferior products in terms of YED?

Answer 7

Negative income elasticity (YED < 0)

Question 8

What happens to the demand for inferior goods during economic growth?

Answer 8

Demand for inferior goods will fall

Question 9

What happens to the demand for inferior goods during a recession?

Answer 9

Demand for inferior goods will rise

Question 10

What is an example of an inferior good based on the text?

Answer 10

Tobacco

Question 11

What is the significance of YED for firms?

Answer 11

It helps estimate how demand for products will change following a change in incomes

Question 12

What does a high YED indicate for firms during rising average incomes?

Answer 12

Firms should focus on producing goods with high YED values (greater than 1)

Question 13

Why might a firm worry if all its products had high, positive income elasticities?

Answer 13

The business would be vulnerable to a recession, suffering sharp falls in demand

Question 14

Fill in the blank: Normal goods have a positive YED, i.e. YED ______.

Answer 14

> 0

Question 15

Fill in the blank: Inferior goods have a negative YED, i.e. YED ______.

Answer 15

< 0

Question 16

What is the average weekly household expenditure on cigarettes for the highest ten percent income group?

Answer 16

£2.30

Question 17

What is the average weekly household expenditure on cigarettes for the lowest ten percent income group?

Answer 17

£2.50

Question 18

True or False: Normal luxuries have a low but positive income elasticity.

Answer 18

False

Question 19

What does a positive YED indicate about a product’s demand when income increases?

Answer 19

More of the good is demanded

Question 20

What does it mean if a product is categorized as a normal necessity?

Answer 20

It has a low but positive income elasticity

Question 21

What is a characteristic of normal luxuries?

Answer 21

High and positive income elasticity

Question 22

What can firms forecast using YED when governments change tax rates?

Answer 22

How demand for their goods would be affected due to changes in disposable incomes