what is likely to happen to the demand for these products when incomes rise by 15%?
TRANSCRIPT
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What is likely to happen to the demand for these products when incomes rise by 15%?
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Income Elasticity
• YED measures the responsiveness of quantity demanded to a change in income
• it is the mathematical relationship between ∆Y & ∆Qd
YED = %ΔQd% ΔY
• If a change in income significantly alters the Qd, then YED is said to be “relatively elastic.”
• If a change in income does not have much affect on Qd, then YED is said to be “relatively inelastic.”
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Y
Q
YED Tells us about the type of good:
- for all ‘normal’ goods, YED will be positive (as we earn more, we buy more)
-for ‘inferior’ goods, YED will be negative (as we earn more, we buy less)
Income Elasticity
Normal good
Inferior good
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Y
Q
D
Y0
Y1
Q0 Q1
Income Inelastic Demand
- a large income change results in only a small change in Qd
- 0<YED <1
- found on ‘necessities’ (we buy the same amount regardless of income changes)
Income Inelastic Demand
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Y
Q
D
Y0
Y1
Q0 Q1
Income Elastic Demand
- a small income change results in a large change in Qd
- 1 < YED
- found on ‘optional’ products (a little boost in income suddenly adds these items to our basket)
Income Elastic Demand
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Income Elasticity – Types of Goods
Elasticity Positive / Negative
Normal, Necessity Inelastic Positive
Inferior, Necessity Inelastic Negative
Normal, Optional Elastic Positive
Inferior, Optional Elastic Negative