Introduction to Income Elasticity of Demand and Goods Classification

The video tutorial explains the concept of income elasticity of demand (YED), which measures how demand for goods changes with income variations. It classifies goods into normal and inferior categories based on their YED values. Normal goods see increased demand with rising incomes, while inferior goods see decreased demand. The tutorial further divides normal goods into necessary and luxury goods, with necessary goods having YED values between 0 and 1, and luxury goods having values greater than 1. Graphical representations and formulas for calculating YED are also discussed.

What does income elasticity of demand measure?

• The change in income when supply changes

• The change in price when demand changes

• The change in demand when income changes

• The change in supply when income changes

Which formula is used to calculate income elasticity of demand?

• Change in price divided by change in quantity

• Change in quantity demanded divided by change in income

• Change in supply divided by change in demand

• Change in income divided by change in price

What is a normal good?

• A good for which demand decreases as income increases

• A good for which demand increases as income increases

• A good for which demand remains constant as income changes

• A good for which demand fluctuates randomly

What is an inferior good?

• A good for which demand decreases as income increases

• A good for which demand increases as income increases

• A good for which demand remains constant as income changes

• A good for which demand fluctuates randomly

What is the relationship between real income and demand for inferior goods?

• No relationship

• Inverse relationship

• Direct relationship

• Random relationship

How is the demand curve affected for a normal good when real income increases?

• It fluctuates randomly

• It shifts outward

• It shifts inward

• It remains unchanged

If a good has a YED value greater than 1, what type of good is it?

• Luxury good

• Necessary good

• Inferior good

• Normal good

What does a YED value between 0 and 1 indicate?

• The good is a normal good

• The good is an inferior good

• The good is a necessary good

• The good is a luxury good

What happens to the demand for a necessary good as income increases?

• Demand increases slowly

• Demand decreases rapidly

• Demand remains constant

• Demand increases rapidly

What is the significance of a YED value less than 0?

• The good is an inferior good

• The good is a necessary good

• The good is a normal good

• The good is a luxury good