8-Income Elasticity of Demand (YED)

Question 1

Define Income Elasticity of Demand (YED)

Answer 1

It measures the responsiveness of quantity demanded to a price Δ

Question 2

Formula for YED

Answer 2

%ΔQD / %ΔY

Question 3

Interpretation of the values of YED (±)

Answer 3

YED is positive (+) —> Normal good and is a luxury good if value is greater than 1.
YED is positive (+) —> Normal good and is a necessity good if value is between 0-1
YED is negative (-) —> Inferior good

Question 4

Interpretation of the values of YED

Answer 4

If YED > 1 –> INCOME ELASTIC DEMAND. Means Quantity Demanded responds MORE than Proportionately to a price Δ.
If YED < 1 –> INCOME INELASTIC DEMAND. Means Quantity Demanded responds LESS than Proportionately to a price Δ

Question 5

Define Normal Good

Answer 5

Goods that RISE in CONSUMPTION as Income INCREASES. They have positive YED (clothing)

Question 6

Define Inferior Good

Answer 6

Goods that FALL in CONSUMPTION as Income INCREASES. They have NEGATIVE YED (Public transport)