The income elasticity of demand (YED) for a good or service is a numerical value which shows us the relationship between the quantity demanded for a product and a change in consumer’s income.
Through calculating YED, we can see how responsive the quantity demanded for a good or service is to a change in income. If the value of YED is positive, this means that the quantity demanded of a good or service will increase as income also increases. This product is therefore a normal good.
If the value of YED is negative, this means that the quantity demanded of a good or service will decrease as income increases. This product is therefore an inferior good.
YED is calculated using this formula:
% ∆ Quantity Demanded / % ∆ Income
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Key terms:
Income – money which is received for completion of work or through investments.
Income elastic demand – quantity demanded changes more than proportionately following a change in income.
Income inelastic demand – quantity demanded changes less than proportionately following a change in income.