YED

Question 1

Income Elasticity of Demand (YED)

Answer 1

YED is a measure of the percentage change in quantity demanded from a percentage change in income.

• YED simply measures how income affects the demand.
• It therefore shows how demand changes as income changes.
• This reveals the type of product: inferior goods, normal goods, luxury goods

Question 2

Negative YED values

Answer 2

⬆income (richer) → ⬇demand
⬇income (poorer) → ⬆demand
= Inferior goods

Question 3

Positive YED values

Answer 3

⬆income (richer) → ⬆demand
⬇income (poorer) → ⬇demand
= Normal goods or luxury goods

Question 4

Define Inferior Goods

Answer 4

type of good for which demand declines as the level of income or real GDP in the economy increases

Question 5

Define Normal Goods

Answer 5

any good for which demand increases when income increases

Question 6

Define Luxury Goods

Answer 6

a good for which demand increases more than proportionally as income rises, and is a contrast to a “necessity good”, where demand increases proportionally less than income.

Question 7

Normal Necessity Goods YED

Answer 7

If positive and inelastic YED (between 0 and 1)

Question 8

Normal Luxury Goods YED

Answer 8

If positive and elastic YED (greater than 1)

Question 9

Inferior Goods YED

Answer 9

Anything negative (elastic and inelastic)

Question 10

YED formula

Answer 10

% change in quantity demanded / % change in income

Question 11

YED = 0

Answer 11

perfectly inelastic - no relationship between income and quantity demanded

Question 12

YED graphs

Answer 12

• Income on the y axis
• Quantity demanded on the x axis
• Normal goods - upwards sloping
• Inferior goods - downward sloping
• inelastic - steeply sloping - YED < 1
• elastic - gently sloping - YED > 1