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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]

Preview Answer

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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