Economics Theme 2.2.4 Flashcards
What is income elasticity of demand
Income elasticity of demand (YED) is a measure of the responsiveness of demand to change in income
How is income elasticity of demand calculated
%change in quantity demanded/% change in income
If YED coefficient is-1<x<+1 what does this mean
Income inelastic
What does income elastic mean
Demand changes at a lower proportion than the increase in income.
If the YED coefficient is < -1 or > +1 what does this mean
it means it is Income elastic
What does income elastic mean
Demand changes at a higher proportion than the increase in income.
How is income elasticity of demand determined
Whether the good is a necessity or a luxury
The level of income of a consumer
Poorer consumers tend to spend their income on necessities
At higher standards of living increased consumer incomes see additional demand tend towards luxury goods as demand for necessities is satisfied
As consumer incomes increase they are likely to spend some of their income on luxuries
How does standard of living effect customers chance of spending
Wealthier countries are likely to have consumers with higher disposable incomes
This means that they have greater spending power and are likely to use some of this greater income to buy luxury goods and services
Therefore, firms will produce superior products that meet the needs of these consumers e.g. high technology goods and complex financial services
How does the economical cycle effect spending
Wealthier countries are likely to have consumers with higher disposable incomes
This means that they have greater spending power and are likely to use some of this greater income to buy luxury goods and services
Therefore, firms will produce superior products that meet the needs of these consumers e.g. high technology goods and complex financial services
