INCOME ELASTICITY OF DEMAND

Question 1

If people’s income changes, how will that affect the quantity demanded?

Answer 1

Y = Represents income
QD = Quantity Demanded

This is how it’s calculated:

% CHANGE IN QD
————————–
% CHANGE IN Y

In other words, YED looks to explain the strength of the relationship between peoples’ incomes and the quantity of a product demanded. - If people’s incomes go up or down, what’s going to happen to the demand for our product.

Question 2

What are the 3 different types of products you need to be aware of

Answer 2

Inferior goods

Normal goods

Necessities (1 of 2 types of inferior goods)

Luxuries (1 of 2 types of inferior goods)

Question 3

What are inferior goods

Answer 3

Inferior goods: Products that show a negative correlation between the changes in income and the quantity demanded. - As incomes go up, the quantity demanded of a product will go down. The same goes for if incomes do go down, the quantity demanded of inferior products go up.

It is demonstrated by a negative YED:
-0.5
-1.6
-2.8
Anything with a minus in indicates that if you’re calculating YED in the exam then it is an inferior good.

Example question:

-1%
+5%
= -0.2

Examples of inferior goods:
Bus tickets and taxis (as people make more, they’ll switch to driving cars themselves)
Staycation (if there is a fall in people’s
incomes, people may decide it makes more financial sense to stay in the home country and go to a nice location in there country)

Question 4

What are normal goods

Answer 4

Normal Goods: Products that show a positive correlation between changes in income and quantity demanded

People tend to demand more things as they have more disposable income

Question 5

What are necessities

Answer 5

Necessities: Necessities are items whose demand doesn’t change much even when incomes fluctuate. The connection between income and demand for these items is not very strong.

If you are calculating anything that is a positive with a 0 in front shows that the product is a necessity.

Example = +3%
+10% The answer would be 0.3

What are examples of inferior goods: Fruit and veg, toothpaste, bubble bath or cleaning products.

Question 6

What are luxuries

Answer 6

Luxuries: Luxuries are items that experience a greater change in demand compared to income fluctuations. There is a strong correlation between changes in income and the demand for these goods.

Numbers that are positive with a whole number are luxuries:
1.1
1.7
3.3

As incomes go up the demand of luxuries goes up

+10%
+6% The answer would be 1.67

This would be a product like a luxury holiday or a sports car - These are products people tend to buy as their incomes go up.