Income elasticity (YED)

Question 1

What is YED?

Answer 1

measures the change in demand in response to a change in income

Question 2

What is a normal good?

Answer 2

Rise in income leads to an increase in demand of that product i.e. more high quality food (steak), jewellery, gym membership

Question 3

What is an inferior good?

Answer 3

as income rises, demand for good decreases e.g. buses

Question 4

What is a luxury good?

Answer 4

as income rises, demand rises a lot e.g. holidays, cars, better more expensive services

Question 5

What is the percentage formula used when calculating elasticities?

Answer 5

(NEW - OLD) / OLD X 100
ALL OVER
(NEW - OLD) / OLD X 100

Question 6

What do negative coefficients mean?

Answer 6

Consumption has also fallen

Question 7

Name the 3 ways businesses use YED?

Answer 7

• Sales forecasting
• Pricing policy
• Diversification

Question 8

Define sales forecasting

Answer 8

firm can predict (forecast) impact of a change in economy on sales revenue

Question 9

Define pricing policy

Answer 9

knowing YED and change in consumer incomes allows firms to decide wether to raise or lower prices.
if incomes are falling and YED is positive, reception in price might help compensate for the reduction ind demand.

Question 10

Define diversification

Answer 10

firms diversify and offer range of goods with diff YED’s so that sales are stabilised

Question 11

What will income elasticity be for a normal good?

Answer 11

Positive

Question 12

What will income elasticity be for an inferior good?

Answer 12

Negative