Summary Unit 2b - Business Economics Income elasticity of demand

Income elasticity of demand

¥ Income elasticity of demand (YED) is a measure of the
responsiveness of demand to a change in income
¥ The relationship between price and demand was straight
forward they always moved in the opposite direction
¥ Is this true of the relationship between income and
demand?
¤ If your income went up what products would you
demand more of?
¤ Would you demand less of anything?

¥ Income elasticity of demand can be negative or positive
i.e. income and demand can move in the same direction or
opposite directions
¤ When demand for a product increase when incomes
increase, we call this a normal good
¤ Normal goods will always have a positive income
elasticity of demand i.e. a + sign
¤ When demand for a product decrease when incomes
increase, we call this an inferior good
¤ Inferior goods will always have a negative income
elasticity of demand i.e. a – sign

Necessities are products that have a positive YED that is
between 0 and 1.
Luxuries are products that have a positive YED that is greater
than 1.
products that have a negative YED i.e. less than 0 are an
inferior good or service.




Income elasticity of demand is determined by:
¤ Whether the good is a necessity or a luxury
¢ At higher standards of living increased
consumer incomes see additional demand tend
towards luxury goods as demand for necessities
is satiated
¤ The level of income of a consumer