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Summary Income elasticity of demand (YED)
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A summary of YED (income elasticity of demand)
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24/11/21Income Elasticity of Demand (YED)
Key term
- Income elasticity of demand
o The responsiveness of quantity demanded to a change in income
Formula
% change∈quantity demanded
YED=
% change∈income
- Most products have a positive income elasticity of demand
o So, as consumer incomes rise, more is demanded at each price
- Normal necessities have an income elasticity of demand between 0 and 1
o For example, if income increase by 10% and the demand for fresh fruit increases by 4% then the
income elasticity is 0.4 – demand is rising less than proportionately to income
- Luxury goods have an income elasticity of demand between 1 and infinity
o For example, an 8% increase in income might lead to a 10% rise in the demand for restaurant meals
then the income elasticity is 1.25 – demand rises more than proportionate to a change in income
- Inferior goods have an income elasticity of demand between 0 and -infinity – the value is negative
o For example cigarettes, low-priced own label foods in supermarkets and the demand for council-
owned properties
o This means that demand falls as income rises
More examples
- YED is usually strong positives for:
o Fine wines and spirits, high quality chocolates (e.g. Lindt) and luxury holidays overseas
o Consumer durables – audio visual equipment, 3G mobile phones and designer kitchens
o Sports and leisure facilities (including gym membership and sports clubs)
- YED is usually lower for:
o Staple food products such as bread, vegetables and frozen foods
o Mass transport (buses, trains)
o Beer and takeaway pizza
o Income elasticity of demand is negative (inferior) for cigarettes and urban bus services
Types of positive income elasticity
- Unitary – the positive income elasticity of demand will be unitary if the proportionate change in the amount
of a product demanded equals the change in consumer income in due proportion
- More than unitary
- Less than unitary
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