Income elasticity of demand
Income elasticity of demand (YED)
The income elasticity of demand is a measure of the responsiveness of the quantity demanded to changes in real income.
YED - formula
Income elasticity of demand is calculated and defined as:
Where Y = real income
and Qd is the quantity demanded
YED is calculated by dividing the %change in the quantity demanded for a good or service by the % change in income.
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 falls as real income rises. Goods or services with such elasticity are called inferior goods. These might include supermarket own brands or fake leather compared to real leather, for example. Write down some other examples of inferior goods.
If the income elasticity is positive, demand increases with real income. These goods are known as normal goods. If your income increases you might choose to buy more clothes or go to the cinema more often, for example. Write down some other examples of normal goods.
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:
