Income Elasticity of

Demand
Unit 3 - Lesson 5

Learning outcomes:
Outline the concept of Income Elasticity of
Demand.
Calculate YED
Show that normal good have a positive YED
value and inferior goods have a negative
YED.
Distinguish between with reference to YED,
necessity and luxury.

Income Elasticity of Demand

Measures the responsiveness of consumers
demand for a good in relation to a change in
income.
Formula...yes you must know!!
YED = % Change Quantity Demanded
% Change in Income

What we know...
Normal Good: As income increases, the demand
for normal goods increases. There is a direct
relationship...positive relationship.
Inferior Good: As income increases, the demand
for inferior goods decreases. There is an indirect
relationship...negative relationship.

Try this
Assume the following levels of Income and the
Quantities Demanded of Good A
Income:
2010: $40,000

Quantity Demanded:
2010: 45 units

2011: $55,000

2011: 40 units

Percentage Change Solutions

% Change Quantity
40 - 45
45

% Change Income

55,000 - 40,000 37.5%

-.11 or 11%
40,000

YED = - 11%
37.5%

YED = - .29

Interpreting YED
YED = -.29
Since the coefficient is negative this tells us
there is an inverse relationship between
Income and Demand telling us it is an
Inferior good.
Also, since the YED < 1(absolute value), we
say that Good A is Income Inelastic.

So...
Normal Goods: Positive YED
Inferior Goods: Negative YED
Income Elastic: YED > 1 (absolute value)
Income Inelastic: YED < 1 (absolute value)

How do businesses use YED...

Businesses need to know peoples future
income changes in order to forecast
production of certain items. Depends on the
production of their good is considered a
normal or inferior good.
Governments use this to be able to forecast
tax revenues too.