Income Elasticity of Demand

YED, Interpreting the Values and the Engel Curve.

Income Elasticity of Demand Measures the responsiveness of quantity demanded of a good to a change in a consumer's Income. YED is calculated by:

% change in Quantity demanded

% change in Income

Whereby the value indicates:

YED > 1 - Income Elastic demand (Luxury good/service)

YED >0 - 1< - Income Inelastic Demand ( Necessity)

YED = 0 - No Relation

YED < 0 - Inferior Good

As we have already learnt, changes in income are a non price determinant of demand, i.e. changes in income can cause an increase or decrease in the demand for a good. The below video will look now into how changes in income can increase or decrease the demand based on the type of good it is (calculated from the values above). The video will also introduce the Engel Curve, which gives us a more detailed understanding of how the YED can change for the same good, based on the levels of consumers income.

YED.mp4

*in the video it says when YED <1 this is income elastic demand. The correct term is income inelastic demand

YED pt2.mp4

Application of YED

Now we understand how we can determine the YED values for different types of goods, we can apply this to understanding how the demand for different goods can impact the overall levels of economic activity. For example, why for those economies based around agricultural goods or necessity goods will see slower rises in production compared to those producing normal or luxury goods, as incomes rise across the economy.

Understanding this will also help us understand why some countries benefit from free trade and specialisation than others, based on the types of goods produced by that economy.

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