Income elasticity of demand 1.2.5

Question 1

YED formula

Answer 1

YED= %change in demand/% change in income

Question 2

YED >1

Answer 2

• luxury
• demand rises when income rises
• responsive to change in income
  e.g. foreign holidays, branded goods, cinema

Question 3

YED 0-1

Answer 3

• normal goods/ necessity
• demand not responsive to change in income
  e.g. bread, milk, eggs

Question 4

YED <0

Answer 4

• inferior
• demand rises when income falls
  e.g. public transport, unbranded/own brand goods

Question 5

Factors influencing YED

Answer 5

• recession - rise in demand of inferior goods
• economic growth - rise in demand for luxury goods
• nature of the good

Question 6

Significance of YED

Answer 6

• production planning - can accurately predict changes in income to plan production needs
• product planning - during recession producers of inferior goods benefit from higher demand