Income elasticity of demand (Implications (Producers (In a growing economy…
Income elasticity of demand
YED = % change in Qd / % change in Y
e.g. Y increase from €1000 to €1600 per month. The nº of steak bought per month :arrow_up: from 5 to 7, the quantity of chicken by 8 to 9 and the quantity of hotdogs falls from 10 to 4.
It is a measure of the responsiveness of D by consumers relative to a change in income
YED '+' or '-'
As Y :arrow_up:, D for the good :arrow_up: (shifts right)
As Y :arrow_down:, D for the good :arrow_down: (left shift)
As Y :arrow_down:, D for the good :arrow_up: ( right shift)
As Y :arrow_up:, D for the good :arrow_down: (left shift)
YED less than or greater than 1
LESS THAN 1
e.g. medicine: If Y :arrow_down: there will be a proportionately smaller decrease in Qd (leftwards shift) as demand is more price inelastic
GREATER THAN 1
e.g. Brand named clothes: If Y :Arrow_down: there would be a proportionately larger decrease in Qd (rightward shift) as demand is more price elastic.
In a growing economy, products with high YED's will experience the most rapid increase in D.
In a recessionary economy, products with low YED's will experience rapid growth.
This info is useful for firms entering new product lines or investing.
e.g. Greece has been in a deep recession. Inexpensive fast food restaurants have tremendously grown. Consumers will falling income, have switched to these instead of ordinary restaurants.
Primary products usually have a low YED whereas, manufactured products usually have a high YED.
These differing YED's mean that in countries around the world, there is a change in structure. In less developed countries, usually the primary sector is the largest whereas, in developed countries the primary sector is smaller and the tertiary or secondary are larger.
Overtime, following economic growth and growth in incomes, manufacturing and services become increasingly important
Economically less developed countries
Low YED's for primary products and high YED's for manufactured products can have significant effects on a country's value of exports and imports = form a barrier to their development
The barrier is formed due to deteriorating 'terms of trade'
Prices increase for manufactured products due to higher demand simultaneously, prices for primary products decrease due to decrease in demand.