Income Elasticity of Demand-YED(1.2.5) Flashcards
What is YED?
measures the extent to which the quantity of a product demanded is affected by a change in income
YED calculation
% change in income
Positive YED value
normal good
(can be classified as necessities or luxuries)
Negative YED Value
inferior good
What is >1 YED mean?
luxury goods
demand rises when income rises and demand falls when income falls
demand is responsive to a change in income
income elastic
e.g. cars, smart watches, foreign holidays, jewellery, branded goods
What does 0-1 YED mean?
necessity goods
demand is not very responsive to a change in income
income inelastic
e.g. staple foods-bread, milk, eggs- fuel, toothpaste
What does <0 YED mean?
inferior goods
demand rises when income falls and demand rises when income falls
negative income elasticity
e.g. public transport, domestic holidays, canned food, unbranded/own brand goods
Three factors influencing YED
recession
economic growth
nature of good
What is recession?
during a recession wages usually fall and demand for inferior goods rises while demand for luxury goods fall
What is economic growth?
during a period of economic growth and rising wages demand for luxury goods increases while demand for inferior goods decreases
What is nature of goods?
luxury or necessity ( both are normal goods)
inferior or normal goods
Significance of YED to a business
can help plan production and products
planning this way helps generate highr profits and have less exposure to downturns in the economy
YED production planning
business needs to plan how much it is going to produce which will help determine the number of resources needed
if a business can determine YED and can accurately predict changes in income it can plan to increase or decrease production
can help manage with financial planning
production planning is easier when YED is relatively inelastic as demand is likely to be more constant
YED product planning
business cycle
during a recession producers of inferior goods benefit from higher demand but lose out when demand rise and customers go to normal goods
some businesses might have different products in their product portfolio to take account of this
e.g. Tesco has its finest, standard and value range to appeal to all segments of the market
What is the business ycle?
the economy goes through different stages over time from recession to recovery and growth and so income will flunctuate
