Income Elasticity Of Demand Flashcards
What does income elasticity of demand measure?
How sensitive consumer demand is when there is a change in income
What is a normal good?
A good that experiences an increase in demand when a consumers income rises eg branded clothing
What is an inferior good?
A good that experiences a decrease in demand when a consumers income rises eg store branded products
How is income elasticity of demand calculated?
% change in quantity demanded / % change in income
What does it mean if the value is positive?
The good is normal
What does it mean if the value is negative?
The good is inferior
What does it mean if the value is more than 1
The good is elastic
What does it mean if the value is between 0 and 1
The good is inelastic
What does the demand curve of a normal necessity look like?
- demand shifts right slightly
- YED = positive, 0-1
What does the demand curve of a normal luxury good look like?
- demand shifts right by a lot
- YED = positive and above 1
What does the demand curve of an inferior good look like?
- demand shifts left
- YED = negative
- the more elastic the good is, the more strongly inferior it is
What is the relationship between income and demand of a normal good?
-Positive relationship, as incomes rise; demand rises too (causes a positive number to be produced)
What is the relationship between income and demand of an inferior good?
Negative relationship; as income rises, demand falls (causes a negative number to be produced)
