IGCSE Economics:Income Elasticity of Demand

IGCSE Economics:Income Elasticity of Demand What is it? ● Income Elasticity of Demand (YED) measures the responsiveness of quantity demanded for a given good or service to a certain change in income. ● YED calculations assume that prices remain constant. ○ Remember that prices, too, can affect levels of quantity demanded. ● This can be used not only on goods but on services too. Normal Goods: ● Remember that it is our own position (and our real income) that determines what a normal good is. ● Demand of the good rises as consumers’ real income rises, vice versa. ● Most of the goods that we see are normal goods such as DVD players, cars, movie tickets or computer games, etc. Inferior Goods: ● Remember that it is our position (and our real income) that determines what an inferior good is. ● The demand for an inferior good falls as real income levels rise, vice versa. ● There is a negative relationship between real income and the demand for the good (i.e. when demand rises usually there has been a fall in income.) ● Examples include: ○ Budget hotels and budget airlines. ○ 3 star hotels and motels. ○ Bus travel (this may be inferior for those who are rich but may be a luxury for those who are poor). What do YED Values Represent? ● When the YED is greater than 0 then the good for which the said YED was calculated for is said to be a normal good (luxury goods are normal goods). ○ When YED is between 0 and 1 then the good for which the said YED was calculated is said to be income inelastic (Such goods include all necessity items as well as items that possess no substitutes, etc.) ■ Necessity goods include tap water, electricity, etc. ○ When YED is greater than 1 the good for which the said YED value was calculated is said to be income elastic (such goods include all luxury items.) ■ Luxury goods include luxury chocolates, cars, mobile phones, snacks, alcoholic beverages, etc. ● When the YED is less than 0 than the good for which the said YED was calculated is said to be an inferior good. ○ Inferior goods include budget hotels, budget airlines, bus travel and VCDs. ● I believe that terms such as unitary elasticity, perfect elasticity and perfect inelasticity still apply for YED values. What does YED Imply? ● During boom time (when an economy is doing very well and there is a general increase in wages) then producers will produce more normal goods (especially luxury goods) and fewer inferior goods. ● During times of economic recession (when an economy is doing very poorly) producers will produce fewer normal goods (especially luxury goods) and more inferior goods.