Theme 1- 2.5 YED

Question 1

What is income elasticity of demand ?

Answer 1

How much demand changes in response to change in income.

Question 2

What the formula for YED ?

Answer 2

Percentage change in quantity demanded/percentage change in income.

Question 3

How can you tell if a good is a normal good or an inferior good ?

Answer 3

When YED is
- positive ==> normal good
- negative ==> inferior good

Question 4

What is the significance of YED on a business ?

Answer 4

• As a consumers income rise businesses want to produce more normal goods.
• producing inferior goods may help prevent a business when consumer incomes are low ( maybe during a recession).