Income Elasticity Of Demand (YED) 1.2.5 Flashcards
Definition of income elasticity of demand (YED)
This is a way to measure the extent to which the quantity of a product demanded is affected by a change in income eg. Tobacco
Formula of YED
% change in quantity demanded/ % change in income
What is the value of YED?
<1 less than 1
Change in demand is less than the change in price
Description of inferior goods
As incomes of consumers rise, demand falls (as you get more money you start to buy better stuff)
Description of normal luxury goods
As incomes rise demand rises
Description of necessity goods
Not affected by income e.g. consumption of water will not rise if someone earns more money (but they may buy a more expensive brand of water bottled water)
-Goods with an addictive nature e.g. cigarettes and alcohol – not affected by income changes but maybe buy cheaper options
What is the value of YED when it is a luxury good?
Income elasticity is more than 1- positive income
-As incomes grows, proportionally more is spent on luxuries
Eg expensive holidays
What is the value of YED when it is a necessity good?
Income elasticity is less than 1 but more than 0
-As incomes grows, proportionally led is spent on necessities
Eg staple groceries ie. milk
What is the value of YED when it is an inferior good?
Income elasticity less than 1- negative income YED
-As income rises, demand falls
Eg economy flight ticket
What does a YED curve show?
Shows a smaller change in demand when price changes
On graph-line is much narrower
