Income Elasticity Of Demand

Question 1

What is YED?

Answer 1

• demand is also affected by customers income
• income elasticity of demand (YED) measures relationship between change in demand and change in income
• %change in demand/ %change in income
• whether it’s positive or negative is important

Question 2

What are the coefficients of YED?

Answer 2

• most products have positive income elasticity, income rises so demand does too
• normal necessities have YED of 0-1, eg income increases by 10%, demand by 4%, so income elasticity is +0.4
• luxury goods have YED of >1, demand rises more than proportionate to change in income
• inferior goods have negative income elasticity of demand
• inferior goods exist when superior goods are available and consumers have money to buy

Question 3

What are normal necessities?

Answer 3

YED 0-1

• bread, veg, frozen foods
• mass transport
• beer and takeaway pizza

Question 4

What are luxuries?

Answer 4

YED >1

• fine wines and spirits, high quality chocolates, luxury holidays
• consumer durables: audio visual equipment, 3G, designer kitchens
• sports and leisure facilities

Question 5

What are inferior goods?

Answer 5

YED <0

• cheaper cars
• cheaper beer
• hamburger, frozen dinners
• cigarettes

Question 6

What is the logic behind YED?

Answer 6

• when income rises, revenue from luxury products rises a lot
• when income rises, revenue from normal necessity products increases by a small amount
• when I come rises, revenue from inferior products lowers