IGCSE Economics:Income Elasticity of Demand What is it? ● Income Elasticity of Demand (YED) measures theresponsiveness of quantity demanded for a given good orservice to a certain change in income. ● YED calculations assume that prices remain constant. ○ Remember that prices, too, can aﬀect levels of quantitydemanded. ● This can be used not only on goods but on services too. Normal Goods: ● Remember that it is our own position (and our real income)that determines what a normal good is. ● Demand of the good rises as consumers’ real income rises,vice versa. ● Most of the goods that we see are normal goods such as DVDplayers, cars, movie tickets or computer games, etc. Inferior Goods: ● Remember that it is our position (and our real income) thatdetermines what an inferior good is. ● The demand for an inferior good falls as real income levelsrise, vice versa. ● There is a negative relationship between real income and thedemand for the good (i.e. when demand rises usually therehas been a fall in income.) ● Examples include: ○ Budget hotels and budget airlines. ○ 3 star hotels and motels. ○ Bus travel (this may be inferior for those who are richbut may be a luxury for those who are poor). What do YED Values Represent?
● When the YED is greater than 0 then the good for which thesaid YED was calculated for is said to be a normal good(luxury goods are normal goods). ○ When YED is between 0 and 1 then the good for whichthe said YED was calculated is said to be incomeinelastic (Such goods include all necessity items as wellas items that possess no substitutes, etc.) ■ Necessity goods include tap water, electricity, etc. ○ When YED is greater than 1 the good for which the saidYED value was calculated is said to be income elastic(such goods include all luxury items.) ■ Luxury goods include luxury chocolates, cars,mobile phones, snacks, alcoholic beverages, etc. ● When the YED is less than 0 than the good for which the saidYED was calculated is said to be an inferior good. ○ Inferior goods include budget hotels, budget airlines,bus travel and VCDs. ● I believe that terms such as unitary elasticity, perfectelasticity and perfect inelasticity still apply for YED values. What does YED Imply? ● During boom time (when an economy is doing very well andthere is a general increase in wages) then producers willproduce more normal goods (especially luxury goods) andfewer inferior goods. ● During times of economic recession (when an economy isdoing very poorly) producers will produce fewer normalgoods (especially luxury goods) and more inferior goods.