Summary Unit 2b - Business Economics Income elasticity of demand
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Course
Unit 2b - Business Economics
Institution
PEARSON (PEARSON)
a)Calculation of income elasticity of demand
b) Interpretation of numerical values of income elasticity of demand
c) The factors influencing income elasticity of demand
d) The significance of income elasticity of demand to businesses
¥ Income elasticity of demand (YED) is a measure of the
responsiveness of demand to a change in income
¥ The relationship between price and demand was straight
forward they always moved in the opposite direction
¥ Is this true of the relationship between income and
demand?
¤ If your income went up what products would you
demand more of?
¤ Would you demand less of anything?
¥ Income elasticity of demand can be negative or positive
i.e. income and demand can move in the same direction or
opposite directions
¤ When demand for a product increase when incomes
increase, we call this a normal good
¤ Normal goods will always have a positive income
elasticity of demand i.e. a + sign
¤ When demand for a product decrease when incomes
increase, we call this an inferior good
¤ Inferior goods will always have a negative income
elasticity of demand i.e. a – sign
Necessities are products that have a positive YED that is
between 0 and 1.
Luxuries are products that have a positive YED that is greater
than 1.
products that have a negative YED i.e. less than 0 are an
inferior good or service.
Income elasticity of demand is determined by:
¤ Whether the good is a necessity or a luxury
¢ At higher standards of living increased
consumer incomes see additional demand tend
towards luxury goods as demand for necessities
is satiated
¤ The level of income of a consumer
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