1.2 M ARKET I NCOME ELASTICITY OF DEMAND Edexcel Business T HEME 1: M ARKETING AND PEOPLE Challenge: What is meant by the term PED? What is the formula for PED? State 2 factors influencing PED. If a product has a PED of -0.7 would it be a good or bad idea to lower price? Explain your answer.

1.2.5 I NCOME ELASTICITY OF DEMAND  In this topic you will learn about  Calculation of income elasticity of demand  Interpretation of numerical values of income elasticity of demand  The factors influencing income elasticity of demand  The significance of income elasticity of demand to businesses

I NCOME ELASTICITY OF DEMAND  Income elasticity of demand (YED) is a measure of the responsiveness of demand to a change in income  If your income went up what products would you demand more of?  Would you demand less of anything?

I NCOME ELASTICITY OF DEMAND  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 increases 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 decreases when incomes increase we call this an inferior good  Inferior goods will always have a negative income elasticity of demand i.e. a – sign Inferior goods Might you switch: Clothing brands Holiday destinations Food products Nights out?

I NCOME ELASTICITY OF DEMAND

YED coefficient TitleRelevance to business -1<+1Income inelasticDemand changes at a lower proportion than the change in income +1Income elasticDemand changes at a higher proportion than the change in income For each of the following YED coefficients state whether it is income elastic or income inelastic:  -1.4    + 1.8

I NCOME ELASTICITY OF DEMAND IS DETERMINED BY : Necessities Luxuries

INCOME ELASTICITY OF DEMAND – RELEVANCE TO BUSINESS  Standards of living Wealthier countries are likely to have consumers with higher disposable incomes This means that they have greater spending power and are likely to use some of this greater income to buy luxury goods and services Therefore, firms will produce superior products that meet the needs of these consumers e.g. high technology goods and complex financial services As global standards of living increase we would expect to see an increase in demand for luxury goods and a movement away from inferior goods Firms will identify the state of the economy e.g. recession and produce goods and services to meet the demand of consumers. For example, pound shops selling necessities and inferior goods are likely to expand in these market conditions.

PED Inelastic PED Elastic YED Elastic YED Inelastic Coefficient of PED and YED In pairs take it in turn to demonstrate your understanding of PED and YED based on the diagram above. Where possible support your explanations with relevant examples. Try to use key terminology including substitutes, necessities, luxury goods etc.

1.2.5 I NCOME ELASTICITY OF DEMAND  In this topic you have learnt about  Calculation of income elasticity of demand  Interpretation of numerical values of income elasticity of demand  The factors influencing income elasticity of demand  The significance of income elasticity of demand to businesses