1.2.5 Income Elasticity of Demand (YED)

Income elasticity of demand (YED)

🔗 The extent to which a change in income will cause a change in demand

Income elastic = Greater than 1

Income inelastic = Between 0 and 1

• Income elastic: Change in demand is more than the change in income
• Income inelastic: Change in demand is less than the change in income EXACTLY 1 = UNITARY INCOME ELASTICITY = Change in demand is equal to change in income

Factors influencing income elasticity of demand

Luxury or necessity

🔗 Luxury goods have an elastic YED, whereas goods that are a necessity, have an inelastic YED, due to them being required by consumers

📌 Normal goods - If income rises, demand rises

📌 Inferior goods - If income falls, demand rises and if incomes rise, demand falls

Proportion of Income Spent on the Good

🔗 Goods that take up a larger proportion of a consumer's income tend to have a more elastic income elasticity of demand (YED). When incomes change, consumers are more likely to adjust their demand for these goods significantly.

📌 For example, expensive items like cars or vacations will see greater changes in demand as income changes, compared to everyday items like bread or toothpaste.