What is income elasticity of demand?

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.

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