1/2
Chapter 9 – yED (Week 7)
Objectives of the chapter
Supply
curve
•
•
•
Define yED and the importance of
negative or positive value
i.
Define: yED,
ii.
Describe/outline: positive value of yED (normal
good), negative value (inferior)
Explain that goods can be classified as
normal and inferior in terms of yED
iii.
Identify and draw how changes in
income would affect the demand for a
iv.
good
•
Explain why some goods might be
normal and others inferior
•
Interpret yED values and explain the
underlying reasons for the values
Explain/distinguish/draw: in a demand curve:
↑y → ∆↑Qd..or ∆D for a good…BECAUSE y is
a _________ of demand
Evaluate/discuss: link yED to why the demand
curve is downward-sloping
Accept no substitutes! (On the road in the Yucatan, Mexico, July 2007)
Notes on syllabus:
 ..diagrams NOT required

yED – definition
Definition: Income elasticity of demand
Income elasticity of demand – yED – measures the responsiveness of demand, i.e. the relative
(percentage) change in the quantity demanded for a good due to a relative (percentage) change in
income. (The lower case “y” signifies personal income, since upper case “Y” is reserved for national
income.)

Formula – % ∆Qd / % ∆y
o it is the change in y which causes the change in Qd
o note that we are speaking of relative change of Qd due
to a relative change in y
o positive value; normal goods (most goods are
“normal”)
2/2
o
negative value; inferior goods (such as public
transportation…potatoes maybe…)
 Main determinants of yED – basically just ask yourself what you
will do with 10% more income, buy shoes or corn flakes?!
o goods with snob appeal…luxury…; high yED
o goods which are necessities…basic items…associated
with low income; low yED
o goods which are considered so basic/low income that
they are eschewed by those who can afford it; negative
yED (inferior goods)
 Examples – you need to be able to give examples of goods with
low/high yED and explain why the good is sensitive to changes in income
 Normal goods – when y↑ and Qd ↑ then this is a normal good
(positive yED value)
Definition: Normal good
A normal good is positively correlated to income, i.e yED is positive. A rise in income increases
demand for normal goods. A fall in income decreases demand for normal goods.
o
Most goods are normal, e.g. have positive values of
yED
o If a good has a yED value greater than 1, one uses the
term superior good (Mr Steele has a penchant for Patek
Philippe wrist watches)
 Inferior goods – when y↓ and Qd↑ then you have an inferior good
(negative yED value)
Definition: Inferior good
An inferior good is negatively correlated to income, i.e. the yED is negative. A rise in income decreases
demand for inferior goods. A fall in income increases demand for inferior goods.
o

Few good examples of inferior goods – perhaps
potatoes and rice in some cases
Discussion (refer to the Engel curve here)
o It largely depends on who is buying the good as to
whether it is income elastic or not – a good restaurant
meal is likely to be far more income elastic for a lower
income person than for a middle income person – and it
might even be an inferior good for high income people
who decide to hire a chef instead! The same might go
for air tickets and cinema.
3/2
Summary and revision
1. Income elasticity of demand (yED) shows the sensitivity of demand for a good
with respect to a change in income
2. The formula for yED is ∆%Qd / ∆%y
3. A positive value of yED means the good is a normal good
i.
Normal goods in diagrams; an increase in income leads to an
increase in demand (demand curve shifts right)
4. A negative value of yED means the good is an inferior good
i.
Inferior goods in diagrams; an increase in income leads to a
decrease in demand (demand curve shifts left)
5. LDCs are often producers of primary goods which have low income elasticities of
demand. As incomes in developed countries increase, demand for primary goods
increase proportionally less. As prices for secondary goods – which have a higher
income elasticity of demand – rise more than prices for primary goods, LDCs will
have to export more primary goods for any given quantity of imported of secondary
goods. This means that the terms of trade for LDCs worsens.
Revision questions:
1. Define yED and explain the importance of negative or positive
values.
2. If demand falls by 10 percent due to a 5% rise in incomes, what
is the value of yED?
3. Why might paperclips and toilet paper have low yED values?
4. How might recessions hit
a. Demand for low-cost air travel
b. Demand for luxury cruises
c. Demand for BMW cars
d. Demand for expensive schooling