Step ➊ : Define 'income elasticity of demand' in the introduction


Income elasticity of demand can be used to distinguish between inferior goods and necessary goods. Income elasticity of demand (YED) is defined as a numerical measure of the responsiveness of the quantity demanded following a change in income, all other factors remain unchanged.

The formula for income elasticity of demand is as follows :

YED =

% change in quantity demanded

% change in income


Step ➋ : Explain the difference between necessary goods and inferior goods.

Necessary goods are products and services that consumers will buy regardless of the changes in their income levels, therefore making these products less sensitive to income change. A necessary good is a type of normal good. Since an increase in income leads to an increase in the quantity demanded for the good, there is a positive relationship and the good is classified as normal. The YED has a positive value. Items such as Staple food products such as bread and vegetables are necessity goods as they have a low income elasticity of demand.

On the other hand, inferior goods, exhibit a negative relationship between income and demand. The YED of an inferior good has a negative value. For example, a person on low income may buy cheap margarine, but, when his income rises, he will afford better quality foods, such as Cheddar.