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!