Income elasticity of demand = YED

What is income elasticity of demand?

It is the responsiveness/sensitivity of demand to income.

How do economists calculate income elasticity of demand?

Income elasticity of demand = Percentage change in quantity demanded
Percentage change in income

How do you interpret income elasticity of demand values?

If YED has a negative value (i.e. less than zero)…

The good is an inferior good. Demand decreases as income increases. It is a negative correlation. For example ASDA’s Smart Price notebooks.

If YED is between 0 and 1…

The good is a necessity – it is income inelastic. Demand will increase if income increases, although demand will increase by a smaller percentage than what income will increase by. For example, If income rises by 10% then demand for lets say apples will increase by less than 10%.It has a positive correlation.

If YED is greater than 1…

This good is a luxury, a normal good. Demand will increase as income increases. The good is income elastic. However this time if income increases by 10% the demand for lets say TVs will increase by more than 10%.

Want to test yourself?

Try out this quiz – beware it contains other elasticities too!

http://wps.aw.com/aw_miller_econtoday_14/60/15397/3941646.cw/content/index.html