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Definition of Income Elastic of Demand (YED)

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Definition of Income Elastic of Demand (YED)

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income elasticity if demand measures the responsiveness in the demand for a certain goods and service to the change in consumers income.

https://www.investopedia.com/terms/i/incomeelasticityofdemand.asp#:~:text=Income%20elasticity%20of%20demand%20is%20an%20economic%20measure%20of%20how,the%20percentage%20change%20in%20income.

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Income Elasticity of Demand: Definition, Formula, and Types

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Income elasticity of demand measures the relationship between a change in the quantity demanded for a particular good and a change in real income.

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Income elasticity of demand (YED) = Percentage change in the quantity demanded/Percentage change in income

Or

YED = % ∆ in Qd/% in ∆Y

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Income Elasticity of Demand (YED) | DP IB Economics Revision Notes 2020

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Revision notes on Income Elasticity of Demand (YED) for the DP IB Economics syllabus, written by the Economics experts at Save My Exams.

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the possible value for YED can take any number depending on the good.

YED<0 inferior goods

0<YED <1 necessity good

YED > 1 luxury good

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YED value range for Luxury goods & services

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YED value range for Luxury goods & services

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A luxury good means an increase in income causes a bigger percentage increase in demand.

It means that the income elasticity of demand is greater than one.

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Income elasticity of demand and types of goods

Income elasticity of demand (YED) measures the responsiveness of demand to a change in income.

Normal good

A normal good means an increase in income causes an increase in demand. It has a positive income elasticity of demand YED. Note a normal good can be income elastic or income inelastic.

Luxury good. A luxury good means an increase in income causes a bigger percentage increase in demand. It means that the income elasticity of demand is greater than one. For example, HD TV's would be a luxury good. When income rises, people spend a higher percentage of their income on the luxury good.
YED calculations

In the above example of a luxury good, income rises (500-550) 10%, demand rises 100/800 - 12.5% YED = 12.5/10 = 1.125

In the above example of a normal good, income rises (500-700) 40%, demand rises 100/800 - 12.5% YED - 12.5/40 = 0.3125

Note: a luxury good is also a normal good, but a normal good isn't necessarily a luxury good.

Inferior good

An inferior good means an increase in income causes a fall in demand. It is a good with a negative income elasticity of demand (YED). An example of an inferior good is Tesco value bread. When your income rises you buy less Tesco value bread and more high quality, organic bread.

Other types of goods

Complementary Goods. Goods which are used together, e.g. TV and DVD player. see: Complementary goods

Substitute goods. Goods which are alternatives, e.g. Pepsi and Coca-cola. See Substitute goods.

Giffen good. A rare type of good, where an increase in price causes an increase in demand. The reason is that the income effect of a rise in the price causes you to buy more of this cheap good because you can't afford more expensive goods. For example, if the price of wheat rises, a poor peasant may not be able to afford meat anymore, so has to buy more wheat. See: Giffen goods

Veblen / Snob good. A good where an increase in price encourages people to buy more of it. This is because they think more expensive goods are better. See: Veblen good

Public goods - goods with characteristics of non-rivalry and non-excludability, e.g. national defence. See: Public Goods

Merit goods. Goods which people may underestimate benefits of. Also often has positive externalities, e.g. education. See: Merit goods

Demerit goods. Goods where people may underestimate costs of consuming it. Often has negative externalities, e.g. smoking, drugs. See: Demerit goods

Related

Private goods - goods which do have rivalry and excludability. The opposite of a public good See: private goods

Free goods - A good with no opportunity cost, e.g. breathing air. See: Free good

Market Failure

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Different types of goods - Inferior, Normal, Luxury - Economics Help

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Income elasticity of demand and types of goods Income elasticity of demand (YED) measures the responsiveness of demand to a change in income. A normal good means an increase in income causes an increase in demand. It has a positive income elasticity of demand YED.

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luxury cars

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YED value range for Necessity goods & services

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YED value range for Necessity goods & services

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Numerical value is between zero to one (0-1)

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An individual's income falls from £450 per week to £405 per week. As a result, their demand for take away meals falls from £50 per week to £30 per week. Calculate the income elasticity of demand for take away meals.

(4)
Step 1: Calculate the % change in QD
% change QD =

% change QD = 40% (1 mark)

Step 2: Calculate the % change in Y % change Y =
% change Y = 10% (1 mark)

Step 3: Insert the above values in the YED formula YED = Step 4: Present the final answer (1 mark)
Final answer = +4 (4 marks)

A 10% fall in income leads to a 40% fall in demand

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Income Elasticity of Demand (YED) | Edexcel A Level Business Revision Notes 2015

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Revision notes on Income Elasticity of Demand (YED) for the Edexcel A Level Business syllabus, written by the Business experts at Save My Exams.

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YED value range for Inferior goods & services 

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YED value range for Inferior goods & services 

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An inferior goods or service means an increase in income causes a fall in demand.

It is a good or service with a negative income elasticity of demand (YED)