Income Elasticity Demand
By Krrish Jain, Keya Kilachand, Mallika Mathew and
Shreiyas Saraf
Income Elasticity of Demand
(YED) is defined as the
responsiveness of demand when
a consumer’s income changes,
Definition ceteris paribus. It is defined as
the ratio of the change in
quantity demanded over the
change in income.
How to Calculate YED?
This can be depicted by an Engel Curve on a
graph.
Producers
Inferior Goods
Demand will increase during periods
of recessions and economic downturns.
Therefore, in a recession, Tesco may
be advised to advertise its value
products. This may attract customers
trying to survive on a tight budget.
Note that for these good, YED<0.
Producers
Normal Good
Demand for a normal good increases
with an increase in income. The
income elasticity demand for such a
good is greater than 0. These goods
too will sell better with a rise income.
Producers
Luxury Goods
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If the economy was booming, then
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firms like Tesco, should try to promote
luxury items (e.g. Organic bread).
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These good will sell better as incomes
are rising. Note that for these goods
YED > 1. 25 100
QUANTITY DEMAND
Long Term
If a firm is producing an inferior good and economic growth in the long term is
positive, then they should consider diversifying into producing normal goods. For
example, a firm producing
black and White TVs should switch to colour
and then HD TVs. Note what is a luxury good
today may become an
inferior good tomorrow as changing
technology changes consumer expectations
about goods.
If a firm knows that YED of is over 1. Then it means it is income elastic (luxury
good). This means that demand will be sensitive to changes in income. High
Consumers
1. Income Elasticity of Demand for a Normal Good
A normal good has an Income Elasticity of Demand
around 1. This means the demand for a normal good will
remain constant as a consumer’s income increases. Rice is
a normal good and when the income of the consumer
increases the demand for rice will remain constant.
2. Income Elasticity of Demand for a Luxury Good
Luxury goods usually have Income Elasticity of Demand
> 1, which means they are income elastic. This implies
that consumer demand is more responsiveness to a
change in income. A car is a luxury good and when the
income of the consumer increases the ability of the
consumer to purchase the car increases and therefore
demand for luxury goods such as cars will increase.
3. Income Elasticity of Demand for an Inferior Good
An inferior good has an Income Elasticity of Demand < 0. This means the demand for an inferior good will decrease as the
consumer’s income decreases. A second hand car is an inferior good. As the income of a consumer increases the consumer will be
able to purchase better quality goods and will no longer purchase an inferior good. Therefore the demand for an inferior good
decreases.
4. Relatively Inelastic Income Elasticity of Demand
0 < Income Elasticity of Demand < 1 are goods that are relatively inelastic. This means that consumer demand rises less
proportionately in response to an increase in income. Gasoline is a relatively inelastic good and therefore change in income does
not cause a great change in quantity demanded.
The Government and the Economy
To explain the impact of Yed on the
economy, we will divide it into three types
of goods: agricultural goods, manufactured
goods and service goods. As the average
income of the population increases, the
demand for agricultural goods increases at a
much slower rate than the demand for
manufactured goods. Thus, the output of
manufactured goods increases since more
people can afford them and are willing to
buy them. This benefits the government
since they can tax luxury goods more
heavily and earn more revenue.
Effect on Businesses
Production Planning
Businesses can alter their goods if
they are aware of a change in income.
However, this can only happen if they
are aware of their product’s YED.
If their products are flexible, then they
can accordingly change their products
in the market based on change or
predicted change in income.
Effect on Business
Labour Force Labour Force
When YED changes, the businesses have to pay If they sell luxury goods and income rises, this
laborers less or more. If they sell inferior goods could lead to them employing a lot of people as
and income rises, this could lead to them laying they would have a high profit margin.
off workers as they go into loss.
Their business would decrease as the YED>1
Their business would decrease as the YED<0 Their cost of resources(labour salary) would
and their simultaneously their cost of increase but not to the extent of their profit
resources(labour salary) would increase which
would lead to them laying off labour.
Bibliography
https://www.intelligenteconomist.com/income-elasticity-of-demand/
https://www.economicshelp.org/microessays/equilibrium/income-elasticity-
demand/
Google Images
Tragakes Economics Textbook
https://www.pearsonschoolsandfecolleges.co.uk/secondary/BusinessAndEconomics
/16plus/EdexcelAlevelBusiness2015/Samples/AS-and-A-level-Business-sample-
Units/Sample-Unit-8-Income-elasticity-ofdemand.pdf
