Income elasticity of demand

Question 1

What is the formula for income elasticity of demand?

Answer 1

% change in quantity demanded / % change in customer income

Question 2

YED interpretation: A positive sign

Answer 2

Normal or luxury good
Customer income has a direct relationship with quantity demanded
As customers get richer, they buy more of these sorts of products

Question 3

YED interpretation: Negative sign

Answer 3

Inferior good
People buy more of it the poorer they are e.g. bus travel and value brands
They switch away from these products as income grows

Question 4

YED interpretation: Value above one

Answer 4

Regardless of the sign, income elastic demand

Small change in income leads to large change in demand for the product

Question 5

YED interpretation: Value less than one

Answer 5

Regardless of the sign, income inelastic demand

Change in income does not have a substantial impact on sales

Question 6

(YED) Interpret -2

Answer 6

Inferior good with income elastic demand

Question 7

(YED) Interpret +0.3

Answer 7

Normal good with income inelastic demand (normal necessities)

Question 8

(YED) Interpret +1.9

Answer 8

Income elastic demand and normal good (luxury product)