Income Elasticity of Demand

Income Elasticity of Demand IED measures the responsiveness of Quantity Demanded following a change in income. So, in simple English – if your income goes up, what will you buy more of, what will you buy less of, and what will stay the same?

IED Formula IED = % change in QD % change in income

IED – some examples 1. In 2009 incomes in Latvia fell by 13%. It was a serious ……………………… Demand for a stay at the Gallery Park Hotel and Spa – a 5 star luxury resort in Riga fell from 5,300 to 3,800 guests. What is the income elasticity of demand for the Gallery Park Hotel and Spa?

IED Between 2000 and 2007 Beijing average incomes rose from $3,800 to $8,800. Meanwhile the demand for cabbage fell from 750 gr per person to 450 gr.

Fuzz Cola have calculated that their Income Elasticity of Demand is – 0.4. What will help them increase their total revenue? A) reducing the price B) cutting costs like advertising C) an economic recession D) replacing labour with capital

Will the answer be positive or negative? What income elasticities would these goods have? Milk Electricity Cigarettes Bus travel Gambling Seychelles Holidays

Three types of goods

http://www.youtube.com/watch?v=3f4aPQK1piw&feature=related