Income elasticity of demand (YED)
Income elasticity of demand (YED)
The income elasticity of demand is a measure of the sensitivity of the quantity demanded to changes in real income.
N.B. In economics the abbreviation of Income is 'Y'. This is because 'I' is used for Investment.
Formula:
Normal and inferior goods
Elasticity can be calculated and a range of values found. What do they show? What do they tell an economist?
Income elasticity may be positive or negative. If income elasticity is negative, demand actually falls as real income rises, which is not the normal reaction. Demand will normally increase as incomes increase as consumers can afford to spend more. As a result, goods or services with such elasticity are called inferior goods.
List some examples of inferior goods.
If the income elasticity is positive, demand increases with real income. These goods are known as normal goods.
List some examples of normal goods.
Elasticity ranges from plus infinity to minus infinity. The sign reveals whether the good is inferior or normal.
Elasticity is given different names over different numerical ranges. Learn these, and the related diagrams.
Some examples of calculations:
Example 1 - income elasticity of demand
Example 2 - income elasticity of demand
