income elasticity of demand

Question 1

what is the income elasticity of demand?

Answer 1

Income elasticity of demand (YED) is the responsiveness of demand to a change in income.

Question 2

income elasticity of demand equation

Answer 2

YED =
% CHANGE IN QUANTITY DEMANDED
————————————–
% CHANGE IN INCOME

Question 3

how does income elasticity of demand affect a normal good/necessity?

Answer 3

• Positive number = more than 0 less than 1
• Demand rises as incomes rise but not that much

Question 4

how does income elasticity of demand affect a luxury good?

Answer 4

• Demand rises as incomes rise
• more than 1
• Examples: exclusive resorts, business class travel, luxury cars

Question 5

how does income elasticity of demand affect an inferior good?

Answer 5

• Demand falls as income rises or demand rises as income falls
• It is a negative number
• Examples: supermarket own brands, bus transport
  because consumers switch to better alternatives, substitute products become more affordable

Question 6

factors influencing income elasticity of demand YED

Answer 6

• Necessity or luxury?
• Attractiveness/brand power
• Strong brand power means people will still buy the products even if incomes are squeezed
• Proportion of income spent on it
• The larger the proportion, the more sensitive you are to changes in income (more elastic)

Question 7

limitations of calculating and using elasticities

Answer 7

• can be difficult to get reliable data
• other factors affect demand e.g. trends
• subject to technological advances = makes previous data less reliable