Income Elasticity of Demand (YED)

Income Elasticity of Demand The income elasticity of demand measures the responsiveness of demand to a change in income. Income elasticity of demand = change in demand change in income Q2 - Q1 Q1 ______ Y2 – Y1 Y1

Income elasticity Measures the relationship between changes in consumer income and the sales of a good. It is used to classify goods as "normal" or "inferior". Goods with an income elasticity greater than 1 can be classified as luxuries instead of necessities; but only the consumer's judgment matters.

Normal Goods In economics, a normal good is any good for which demand increases when income increases, i.e. with a positive income elasticity of demand. Examples: Whole wheat, organic pasta noodles are an example of a normal good.

Inferior Good In economics, an inferior good is a good whose demand decreases when consumer income rises (or demand rises when consumer income decreases), unlike normal goods, for which the opposite is observed. Normal goods are those for which demand rises as consumer income rises. Goods like canned soups and vegetables are inferior goods.

Calculating Income Elasticity of Demand (Normal Good) Time / Period Winsor Estates Residents Year 2016 2017 Months Chicken Demand (Lbs) Average Annual Income (G$) Chicken Demand (Lbs) Jan 50,000 $ 30,000,000 56100 $ 33,660,000 Feb 56,000 $ 33,712,000 56123 $ 33,673,800 Formula 6,000 50,000 ___________ 3,712,000 30,000,000 0.12/0.12373 56,000 – 50,000 50,000 _______________ 33,712,000 – 30,000,000 30,000,000 Q2 - Q1 Q1 ______ Y2 – Y1 Y1 = = = 0.9698

Calculating Income Elasticity of Demand (Inferior Good) Republic Park Residents 2016 2017 Production Demand (Lbs) Income (G$) Production demand (Lbs) 45000 $ 27,090,000 46123 $ 27,766,046 40000 $ 31,200,000 38236 $ 30,588,800 Formula -5,000 45,000 ___________ 4,110,000 27,090,000 40,000 – 45,000 45,000 _______________ 31,200,000 – 27,090,000 27,090,000 -0.11/0.152 = Q2 - Q1 Q1 ______ Y2 – Y1 Y1 = = - 0.724

Interpreting the signs. Note the following: If the sign of the answer is + this means it is a Normal good If the sign of the answer is - this means it is a Inferior good

Normal Goods Normal Goods have + sign INCOME QUANTITY Normal Goods have + sign Goods are said to be normal if the quantity demanded decreases and the income received decreases. Goods are said to be normal if the quantity demanded decreases and the income received decreases INCOME QUANTITY

Inferior Goods Inferior Goods have a – Sign INCOME QUANTITY Inferior Goods have a – Sign Goods are said to be inferior if the quantity demanded increases and the income received decreases. INCOME QUANTITY

Luxury Good In economics, a luxury good (or upmarket good) is a good for which demand increases more than proportionally as income rises, and is a contrast to a "necessity good", where demand increases proportionally less than income.

Complementary Good Material or good whose use is interrelated with the use of an associated or paired good such that a demand for one (tires, for example) generates demand for the other (gasoline, for example). If the price of one good falls and people buy more of it, they will usually buy more of the complementary good also whether or not its price also falls. Similarly, if the price of one good rises and reduces its demand, it may reduce the demand for the paired good as well. Also called complementary product.

Substitute Good  Substitute goods are two alternative goods that could be used for the same purpose. Substitute present the consumer with alternative choices If the price of one good increases, then the demand for the substitute is likely to rise Therefore, substitutes have a positive cross elasticity.

Graphs showing substitutes In the diagram on the left, there is a fall in the price of Android Phones causing consumers to demand more. (movement along the demand curve). As a result, there is a fall in demand for the substitute (Apple iPhone) leading to less demand.