Income Elasticity of Demand

Income Elasticity of Demand YED

This measures the responsiveness of demand to a change in income.
e.g. if your income increase by 5 % and your demand for mobile phones increased 20% then the YED = 20/ 5 = 4.

YED = % change in Q.D
% change in Income

Definition of INFERIOR GOOD

This occurs when an increase in income leads to a fall in demand. Therefore YED<0.

E.g. clothes from charity shops, cheap bread
When your income increase you buy better quality goods

Defintion of NORMAL GOOD

This occurs when an increase in income leads
To an increase in demand for the good, Therefore YED>0

Definition of LUXURY GOOD

This occurs when an increase in demand causes a bigger
% increase in demand, therefore YED>1.

Luxury goods will also be normal goods and we can say
They will be income Elastic
Income inelastic This means an increase in income leads to a smaller % increase in demand. Therefore 0> YED <1
Firms will make use of YED by producing more luxury goods during periods of economic growth, similarly there will be less demand for inferior goods.

Essays and Revision Notes on Supply and Demand

Elasticity

Questions on Elasticity

Q. Explain what PED and YED are
Q. Examine the usefulness to companies of YED, PED and YED
Q. Discuss why PED and PES of manufactured goods typically exhibit greater price stability than primary goods
Q. Examine what will affect the revenue of a business such as Euro tunnel

Q. A Cinema faces the following Elasticity’s

      PED of going to the cinema                   of         2.3
      XED with respect of video rentals         of         1.5
      YED of going to the cinema                  of         1.8

Explain what these mean
How can the firm use the knowledge of these elasticity’s
What other factors would a firm look at when deciding whether to open another cinema?

Explain how elastic ties are useful in setting prices for train companies
Explain the effects of an increase in oil prices
Identify and evaluate various ways a cricket club could increase the demand for its tickets
Should we be concerned about the world running out of oil?

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