# Income elasticity of demand (YED) (AS/A LEVELS/IB/IAL)

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Level: AS Levels, A Level, GCSE – Exam Boards: Edexcel, AQA, OCR, WJEC, IB, Eduqas – Economics Revision Notes

## Income elasticity of demand (YED)

#### Definition

Income elasticity of demand (YED) measures the responsiveness of the quantity demanded for a good or service to a change in income.

#### Normal Goods (+YED)

Normal goods tend to have a positive YED. This is because as incomes increase consumers tend to purchase what they deem to be better products (Normal Goods).

When incomes increase consumers tend to demand and buy more organic products (Normal goods)

YED is positive – As income increases, demand for the product or service will increase (Vice versa).

#### Inferior Goods (-YED)

Inferior goods tend to have a negative YED. This is because as incomes decrease consumers tend to switch demand from normal goods to inferior goods.

Example:

When incomes decrease consumers tend to demand more tinned fruit and vegetables (Inferior goods) rather than fresh fruit and vegetables.

YED is negative – As income increases, demand for the product or service will fall (Vice versa).

### The determinants of YED

• Availability of substitutes – if a good has more substitutes, consumers are exposed to more choice and differing levels of price / quality. Therefore, if a consumers income changes, they may switch to a cheaper alternative
• Time
• The degree of necessity for the good – if the good demanded is a necessity, consumers are likely to keep purchasing it regardless of a change in income

#### Exam Tip

Always show working out for elasticity questions. Also write the formula down first before you show your working.

Quick Fire Quiz – Knowledge Check

1. Define YED (2 marks)

2. State the formula for YED (2 marks)

3. Explain what the following suggest (4 marks)

• a) YED > 1
• b) YED <1
• c) YED = 1
• d) YED = Infinity

4. State the four types of goods that YED analyses (4 marks)

5. Provide two examples of each type of good (4 marks)

6. Explain what the following suggest (4 marks)

• YED > 1 → what type of good?
• YED < 1 → what type of good?
• YED = 0 → what type of good?

7. Draw a YED diagram showing the following (4 marks)

• YED < 1
• YED > 1

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