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Income elasticity of demand (YED) (Inferior goods (Demand falls as income…
Income elasticity of demand (YED)
It is a measure of the responsiveness of demand for a good/service to a change in income
YED Formula
% change in quantity demanded / % change in income
Necessities
Has a low but positive income elasticity of demand
Is usually between 0 and 1
Example is milk and bread
Normal goods
As consumers income rises, more goods are demanded
If income rises you'll buy more
It will have a positive income of elasticity of demand
If income decreases you will buy less
Inferior goods
Demand falls as income rises
As income rises, demand rises
Has a negative income elasticity of demand
As income decreases, demand rises
Inferior goods are below 0 when calculated
An example is tesco value range
Determinants of income elasticity
Whether the good is a necessity or luxury
Level of income
Luxuries
Have an income of demand greater than 1
Example is a super car
Income elasticity - relevance to firms
Trade cycle
This means consumers spend more money
They tend to spend it on luxury goods and necessities
When economy is in recovery and is leading to a boom, disposable incomes rise
Standards of living
Wealthier countries are likely to have consumers with higher disposable incomes
Firms will produce superior goods that meet the needs of consumers