9: Income Elasticity of Demand

Question 1

Income Elasticity (2)

Answer 1

• The extent to which demand for a product
• Changes when there is a change in consumers’ real incomes

Question 2

Factors influencing YED (2)

Answer 2

• Necessity vs self-indulgence
• E.g. toilet paper vs champagne

Question 3

‘Real’ (3)

Answer 3

• Changes in money (e.g. wages)
• Excluding the distorting effect of changes in prices
• So a fall in real wages might be that wages are unchanged, but prices have risen

Question 4

YED Formula (1)

Answer 4

% change in quantity demanded / % change in income

Question 5

Types of goods (3)

Answer 5

• Normal good
• Luxury good
• Inferior good

Question 6

Normal good (2)

Answer 6

• Positive income elasticity
• YED of between 0.1 and 1.5

Question 7

Luxury good (2)

Answer 7

• Very positive income elasticity
• YED of above 1.5

Question 8

Inferior good (2)

Answer 8

• Negative income elasticity
• YED below 0

Question 9

Negative income elasticity (3)

Answer 9

• A product for which sales fall
• When people are better off
• But rise when people are worse off

Question 10

Positive income elasticity (3)

Answer 10

• A product for which sales rise
• When people are better off
• But fall in recessions

Question 11

Recession (1)

Answer 11

• Two or more quarters of negative economic growth

Question 12

Significance of YED to firms COA (7)

Answer 12

• Allows firms to sales forecast
• Based on the economic climate
• So can plan growth strategy (or lack of)
• And therefore plan higher production capacity
• And hiring and training new staff
• And can plan funding (or lack of) to meet this growth
• E.g. loans/share capital

Question 13

Knowing the YED of a product is vital in order to……..

Answer 13

• Develop a well-balanced product portfolio