1.2.5 Income elasticity of demand - syllabus Students should be able to: Define income elasticity of demand (YED) Calculate and interpret numerical values of income elasticity of demand Analyse factors that influence YED Evaluate the significance of YED to businesses

Income elasticity of demand Income elasticity of demand measures the responsiveness of demand to changes in ___________ Usually demand will _______ as incomes rise. This is true for normal goods. These have a positive income elasticity of demand. Examples include The opposite of a normal good is an ___________ good.

Formula for income elasticity The formula is similar to price elasticity: Income elasticity = % change in quantity demanded % change in income % change = difference X 100 original

Income elastic versus income inelastic As with price elasticity, answers above 1 mean that demand is income ___________ positive answers also mean that the good is normal. Answers between 0 and 1 mean demand is relatively unresponsive to changes in income, it is income ____________. Answers that are negative mean demand falls as incomes _______ (inferior goods).

Inferior, luxury or normal good? _________ goods are those goods for which demand rises as incomes increase. YED > 0 ____________ goods are those goods for which demand rises as incomes falls YED < 0 ________ goods are those goods for which demand rises at a faster rate than income. YED > 1

What factors influence income elasticity?

What is the significance of income elasticity to firms?

What is meant by real incomes? Real incomes are incomes after allowing for inflation % change in real incomes = % rise in average earning - % rise in prices e.g. if incomes rose by 0.6% in 2014 but prices (rate of inflation) rose by 1.6% people were actually ______ worse off