Income Elasticity of Demand (YED) - A-Level Economics
Income Elasticity of Demand (YED)
YED=% change in quantity demanded / % change in income
Income Elasticity of Demand (PED) is a measure of how responsive demand is to a change in real income.
If YED is greater than 1, the good is income elastic.
If YED is smaller than 1, the good is income inelastic.
N.B. To classify negative YEDs, use the modulus of the value with the rules above (i.e. ignore the negative sign whilst you classify the YED)
For normal goods, YED is positive because an increase in income will lead to an increase in quantity demanded.
For inferior goods, YED is negative because an increase in income will lead to a fall in demand. This is because consumers tend to switch to higher-‐quality goods as their income rises.
N.B. Therefore the demand curve for an inferior good is downward sloping.
Factors affecting YED
Necessity Goods, such as staple foods like rice, have an inelastic YED because income changes do not lead to significant changes in such goods.
Luxury Goods, such as watches, have an elastic YED because a rise in income leads to consumers purchasing more of luxurious items. In contrast, if income falls, consumers will give up luxury goods before necessities.
Addictive Goods, such as cigarettes, tend to be income inelastic because consumers continue to buy the despite fall in incomes.
Income Elasticity of Demand (YED) is a measure of the responsiveness of demand for a product or service to a change in consumer income. It is calculated as the percentage change in quantity demanded divided by the percentage change in income.
The formula for calculating YED is: YED = (% change in quantity demanded) / (% change in income)
YED values can be positive or negative. A positive YED means that the quantity demanded of a product or service increases as income increases. A YED value greater than 1 indicates that the product or service is income elastic, meaning that the demand for it is very responsive to changes in income. A YED value less than 1 indicates that the product or service is income inelastic, meaning that the demand for it is relatively unresponsive to changes in income.
A luxury car is an example of a product with a positive YED. As income increases, people are more likely to purchase luxury cars, and the quantity demanded of luxury cars increases.
A necessity like salt is an example of a product with a negative YED. As income increases, people do not consume more salt, and the quantity demanded of salt remains relatively constant.
Some factors that influence YED include the availability of substitute goods, the necessity of the good or service, and the proportion of income spent on the good or service.
YED is used to analyze how changes in consumer income affect the demand for goods and services. It can also be used to predict the effect of changes in income on the quantity demanded of a product or service.
Businesses can use YED to determine the level of risk associated with a product or service. If a product has a high YED, the business knows that demand for the product is sensitive to changes in income, and it may be riskier to invest in that product. On the other hand, if a product has a low YED, the business knows that demand for the product is relatively stable, and it may be a safer investment.
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