Y1/IB 13) Income Elasticity of Demand (YED)

Summary

This video explores income elasticity of demand (YED), explaining how demand responds to changes in income. It distinguishes between normal goods, where demand increases with income, and inferior goods, where demand decreases. The concept of elasticity is explored in greater detail, with normal goods classified as either luxuries (YED > 1) or necessities (YED < 1). The importance of sign interpretation in YED calculations is emphasized, helping to categorize goods accurately. Ultimately, the video provides an in-depth look at how income influences consumer behavior and demand patterns.

Takeaways

• 😀 Income elasticity of demand (YED) measures how responsive the quantity demanded of a good is to a change in income.
• 😀 A **positive YED** indicates a **normal good**, where demand increases as income rises.
• 😀 A **negative YED** indicates an **inferior good**, where demand decreases as income rises.
• 😀 Normal goods see their demand curve shift to the right when income increases, while inferior goods see their demand curve shift to the left.
• 😀 The formula for YED is: (Percentage Change in Quantity Demanded) / (Percentage Change in Income).
• 😀 YED values greater than 1 indicate that the good is **elastic**, meaning demand is highly responsive to income changes.
• 😀 YED values less than 1 indicate that the good is **inelastic**, meaning demand is less responsive to income changes.
• 😀 If YED equals 1, it indicates **unitary elasticity**, where the percentage change in demand is exactly equal to the percentage change in income.
• 😀 For normal goods, **luxury goods** have YED greater than 1, while **necessities** have YED less than 1.
• 😀 Luxury goods experience a significant increase in demand as income rises, while necessity goods experience only a slight increase in demand.
• 😀 Examples of normal goods include designer clothing and high-end cars, while inferior goods include public transportation and generic supermarket products.

Q & A

What is income elasticity of demand (YED)?

Income elasticity of demand (YED) measures how the quantity demanded of a good responds to a change in consumer income. It is calculated by dividing the percentage change in quantity demanded by the percentage change in income.

How do normal goods react to changes in income?

For normal goods, when income increases, the quantity demanded increases, which causes the demand curve to shift to the right. The YED for normal goods is positive.

What is the relationship between income and demand for inferior goods?

For inferior goods, when income increases, the quantity demanded decreases, which causes the demand curve to shift to the left. The YED for inferior goods is negative.

What does a positive YED indicate?

A positive YED indicates that the good in question is a normal good, meaning that as income increases, the demand for the good also increases.

What does a negative YED indicate?

A negative YED indicates that the good is an inferior good, meaning that as income increases, the demand for the good decreases.

What happens if YED is greater than 1?

If YED is greater than 1, demand is considered elastic, meaning that the quantity demanded is highly responsive to changes in income.

What happens if YED is less than 1?

If YED is less than 1, demand is considered inelastic, meaning that the quantity demanded is less responsive to changes in income.

What is the difference between luxury and necessity goods in terms of YED?

Luxury goods have a YED greater than 1, meaning their demand increases significantly as income rises. Necessity goods have a YED less than 1, meaning their demand increases with income, but the increase is relatively small.

Can you give examples of normal goods?

Examples of normal goods include designer clothing, cars, and luxury items. These goods see an increase in demand as consumers' incomes rise.

Can you give examples of inferior goods?

Examples of inferior goods include generic or store-brand products, and public transportation. As income increases, people tend to buy fewer inferior goods.