Income Elasticity of Demand

Question 1

What is YED?

Answer 1

Measures the % change in demand for a product following a % change in income.
ie. how sensitive demand is to a change in income

Question 2

What is the formula for YED?

Answer 2

% change in Y

Question 3

What is a normal good?

Answer 3

Have a positive relationship with income.

Question 4

Is the YED value for a normal good positive or negative.

Answer 4

Positive

Question 5

What are normal luxuries?

Answer 5

Positive YED
Income elastic goods
Demand is very sensitive to changes in income

Question 6

What are normal necessities?

Answer 6

Positive YED
Income inelastic goods
Demand is not very sensitive to changes in income

Question 7

What are inferior goods?

Answer 7

Goods which have an inverse relationship with income.

Question 8

Is the YED value for inferior goods positive or negative?

Answer 8

Negative

Question 9

Why is YED important?

Answer 9

A business must understand the impact on their demand cause by a change in income when the economy grows or shrinks?

Question 10

What is the trade cycle?

Answer 10

A diagram that shows the growth of GDP over time, showing when the economy moves in and out of booms and recessions.