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.