1.2.5 Income elasticity of demand - syllabus
Students should be able to:
• Define income elasticity of demand (YED)
• Calculate and interpret numerical values of
income elasticity of demand
• Analyse factors that influence YED
• Evaluate the significance of YED to
businesses
Income elasticity of demand
Income elasticity of demand measures the
responsiveness of demand to changes in
___________
Usually demand will _______ as incomes
rise.
This is true for normal goods. These have a
positive income elasticity of demand.
Examples include
The opposite of a normal good is an
___________ good.
Formula for income elasticity
The formula is similar to price elasticity:
Income elasticity = % change in quantity demanded
% change in income
% change = difference X 100
original
Income elastic versus income inelastic
As with price elasticity, answers above 1
mean that demand is income ___________
positive answers also mean that the good
is normal.
Answers between 0 and 1 mean demand is
relatively unresponsive to changes in
income, it is income ____________.
Answers that are negative mean demand
falls as incomes _______ (inferior goods).
Inferior, luxury or normal good?
_________ goods are those goods for
which demand rises as incomes increase.
YED > 0
____________ goods are those goods for
which demand rises as incomes falls
YED < 0
________ goods are those goods for which
demand rises at a faster rate than income.
YED > 1
What factors influence income elasticity?
What is the significance of income elasticity to firms?
What is meant by real incomes?
Real incomes are incomes after allowing for
inflation
% change in real incomes =
% rise in average earning - % rise in prices
e.g. if incomes rose by 0.6% in 2014 but
prices (rate of inflation) rose by 1.6% people
were actually ______ worse off