Income elasticity of demand (CH 9)

Question 1

Define YED

Answer 1

Responsiveness of change in demand to a change income

Question 2

YED formula

Answer 2

% change in quantity demanded / % change in income

Question 3

YED and Inferior goods relationship

Answer 3

YED < 0 which see’s a fall in demand as income increases

• low quality goods
• Sainsbury’s

Question 4

YED and normal goods relationship

Answer 4

YED > 0 demand increases as income increases

Question 5

For normal goods what does YED 0 to 1 suggest for demand?

Answer 5

Demand only increases by a smaller amount then increases income ( income inelastic)

Question 6

YED and normal Luxury goods

Answer 6

YED > 1 increase in income causes an even bigger increase in demand

Question 7

What does a YED = 1 suggest?

Answer 7

Demand changes proportionally to income, so product has unitary product elasticity

Question 8

Factors effecting income elasticity

Answer 8

• Luxuries - income elastic
• Necessities - income inelastic