Income Elasticity of Demand

eleanor.adamandi
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This note talks you through the concept of Income Elasticity of Demand

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Income Elasticity of Demand 

The Income Elasticity of Demand (YED) of a good measures the responsiveness of the quantity demanded of a good to a change in incomeIn other words, it measures how much demand would rise/fall when the income of consumers changes

Mostly Positive

The YED for most goods is POSITIVEHowever, there are exceptions to this; Inferior goods tend to have a negative YED, this means that when a consumer's income rises, their demand for the good will fallAlso, some goods have no no YED at all.

Why?Positive YEDWhen a good had a positive YED, it means that when income rises, so too will demand for the good.Normal goods (ones which obey the law of demand, remember) have a positive YED, because when consumers have more money, they are able to buy (demand) more things.Negative YEDAs stated above, inferior goods have negative YED.Inferior goods are things such as own-brand supermarket items.When people's income rises, they can now afford to buy more upmarket goods - instead of buying own brand Cola, they buy Coca Cola instead.When income rises, demand for inferior products falls, as people demand better quality products.For this reason, the YED for inferior goods is NEGATIVEYED of 0Some goods have zero YED.These are goods that people purchase when their income is low, and when their income increases, they do not demand any more of it, because they do not need any more of it.A good example of such a product is salt.

Income Elasticity of Demand