Income Elasticity Of Demand

Question 1

YED

Answer 1

Income elasticity of demand (YED) shows the responsiveness of quantity demanded due to change in real income

Question 2

YED calculation

Answer 2

% change in quantity demanded / % change in income

Question 3

Normal goods (necessities)

Answer 3

• Normal goods have a positive income elasticity of demand so as consumers income rises, more is quantity demanded at each price. (Outward shift on the demand curve)
• Normal necessities = YED between 0 and +1
• Demand = income inelastic

Question 4

Luxury goods

Answer 4

• YED = >+1
• Quantity demanded rises more than proportionally to a change in income
• Demand is income elastic

Question 5

Inferior goods

Answer 5

• Have a negative income elasticity of demand
• Quantity demanded falls as income rises
• YED = <0

Question 6

Determinants of YED (PICS)

Answer 6

-P= Perception of a good - Normal, inferior or luxury
-I= Level of income and wealth - high levels will mean a greater income inelasticity
-C= Confidence
-S= The savings rate