Income Elasticity of Demand and Types of Goods
Explain how economists use the concept of income elasticity of demand to distinguish between different types of goods.
[CIE AS level November 2017]
Step ➊ : Define income elasticity of demand in the introduction and state it’s formula.
Income elasticity of demand (YED) is defined as a numerical measure of the responsiveness of the quantity demanded following a change in income.
The formula for income elasticity of demand formula is as follows :
%change in quantity demanded
% change in income
The concept of income elasticity of demand can be used to distinguish between normal goods, inferior goods and luxury goods.
Step ➋ : Explain the different income elasticity of demand values for normal goods, necessity goods,luxury goods and inferior goods.
➤ 2.1 A positive income elasticity of demand is associated with normal goods. An increase in income will lead to a rise in demand for a normal good.
An increase in income leads to an increase in the quantity demanded for a normal good. Conversely a decrease in income leads to a decrease in the quantity demanded for a normal good. Since there is a positive relationship, the YED has also has positive coefficient. Examples of normal goods include food staples, clothing, and household appliances.
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