Income Elasticity of Demand (YED)

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What is income elasticity of demand (YED)?

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Income elasticity of demand is the responsiveness of quantity demanded to a change in household income.

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How is YED measured?

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YED is measured by the equation: % change in Qd / % change in income = YED.

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What does a YED of +1.5 indicate?

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A YED of +1.5 indicates that for every 1% change in household income, the quantity demanded of a good will change by 1.5%.

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What are normal goods in terms of YED?

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Normal goods have a positive YED, meaning quantity demanded rises as income rises.

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What are necessity goods?

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Necessity goods are normal goods with a YED between 0 and 1, indicating a less than proportionate change in quantity demanded with income changes.

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What are luxury goods?

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Luxury goods are normal goods with a YED greater than 1, indicating a greater than proportionate increase in quantity demanded with income increases.

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What are inferior goods?

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Inferior goods have a negative YED, meaning quantity demanded falls as household incomes rise.

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What is an example of an inferior good?

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Tinned vegetables are an example, with a YED of -0.80, meaning quantity demanded falls as income rises.

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What is the Engel Curve?

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The Engel Curve shows the relationship between income and demand, illustrating how demand for goods changes with income over time.

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How does YED relate to structural changes in the economy?

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YED data shows how industrial structure changes as household incomes rise, with primary goods having a YED between 0 and 1, and manufactured goods having greater positive YED values.