Income Elasticity of Demand

Question 1

What is the Formula for Income Elasticity of Demand?

Answer 1

YED = % change in Quantity Demanded / % change in Income

Question 2

What does Income Elasticity of Demand measure?

Answer 2

measures how responsive Quantity Demanded is to changes in income i.e. how much does demand change when incomes rise or fall.

Question 3

What is an Inferior Good?

Answer 3

it is a good like an own brand supermarket good and have a -negative (<0) income elasticity. When incomes rise demand for these goods as consumers are buying higher quality alternatives.

Question 4

What is a superior good?

Answer 4

normal goods that are seen as luxuries. Demand for these increases when incomes rise. They are income elastic as demand changes by a greater amount than income (>1)

Question 5

What is a normal good?

Answer 5

Positive income elasticity of demand so as customers income rises more is demanded at each price.

Question 6

What is an Inferior Good?

Answer 6

Negative income elasticity of demand meaning that demand falls as income rises and demand rises as income falls. inferior goods/services tend to exit where superior goods are available if the customer has the money to be able to but it e.g. low price own brand supermarket foods.

Question 7

What are the uses of Income Elasticity of Demand?

Answer 7

-Knowledge or Income Elasticity of Demand helps firms predict the effect of a change in consumers income on the demanded for their product.
-Helps the business plan ahead
-Luxury products with high-income elasticity see greater sales volatility

Question 8

What are the Limitations of Income Elasticity of Demand?

Answer 8

-Values based of estimates
-Forecasting changes in demand is very difficult
-Elasticity changes over time so it is short term
-Info used to calculate may become outdated