1. Income elasticity of demand (YED)

2. Definition
Measures the responsiveness of demand for a good or service after a change in consumer incomes.

3. The YED of a good or service is calculated as follows:-
YED formula
The YED of a good or service is calculated as follows:-
Percentage change in the quantity demanded of the good or service
Percentage change in consumer incomes
For normal goods, this will give a positive (+) figure

4. Factors that determine the YED for a good or service
1. Whether the good or service is a luxury.
Where the good or service is a luxury, the YED for that good or service is likely to be high (elastic).
This means a rise in consumer incomes will see a proportionally larger rise in demand for that luxury (an elastic response).

5. Defining luxuries
1. Something inessential but conducive to pleasure and comfort. 2. Something expensive or hard to obtain. 3. Sumptuous living or surroundings
Good/service
Equivalent luxury
Domestic holidays
Public transport
Home cooking
Renting videos

6. Factors that determine the YED for a good or service
2. Whether the good or service is a necessity.
Where the good or service is a necessity, the PED for that good or service is likely to be low (inelastic).
This means a rise in consumer incomes will see a proportionally smaller rise in demand for that necessity (an inelastic response).

7. Defining necessities Good/service Milk Bread Non designer clothes
1: the quality or state of being necessary
2a : pressure of circumstance
b : physical or moral compulsion
c : impossibility of a contrary order or condition
3: the quality or state of being in need; especially : poverty
4a : something that is necessary : requirement
b : an urgent need or desire
Good/service
Milk
Bread
Non designer clothes
Tea bags

8. Likely to be a necessity
PED calculations
PED
Elasticity
e.g.
Description
< +1
Inelastic
+ 0.6
Likely to be a necessity +1
Unitary
> +1
Elastic
+1.3
Likely to be a luxury

9. Example 1
The following are income and corresponding demand figures for Soneji’s Super Smoothies.
Average Y1 = £10,000pa QD1 = 1,000 smoothies per week
Average Y2 = £11,000pa QD2 = 1,200 smoothies per week
Comment on the resulting YED

10. Example 2
The following are income and corresponding demand figures for Soneji’s (not so)Super vege. sausages.
Average Y1 = £10,000pa QD1 = 1,000 packets a week
Average Y2 = £11,000pa QD2 = 1,050 packets a week
Comment on the resulting YED