What is likely to happen to the demand for these products when incomes rise by 15%?

Income Elasticity

• YED measures the responsiveness of quantity demanded to a change in income

• it is the mathematical relationship between ∆Y & ∆Qd

YED = %ΔQd% ΔY

• If a change in income significantly alters the Qd, then YED is said to be “relatively elastic.”

• If a change in income does not have much affect on Qd, then YED is said to be “relatively inelastic.”

Y

Q

YED Tells us about the type of good:

- for all ‘normal’ goods, YED will be positive (as we earn more, we buy more)

-for ‘inferior’ goods, YED will be negative (as we earn more, we buy less)

Income Elasticity

Normal good

Inferior good

Y

Q

D

Y0

Y1

Q0 Q1

Income Inelastic Demand

- a large income change results in only a small change in Qd

- 0<YED <1

- found on ‘necessities’ (we buy the same amount regardless of income changes)

Income Inelastic Demand

Y

Q

D

Y0

Y1

Q0 Q1

Income Elastic Demand

- a small income change results in a large change in Qd

- 1 < YED

- found on ‘optional’ products (a little boost in income suddenly adds these items to our basket)

Income Elastic Demand

Income Elasticity – Types of Goods

Elasticity Positive / Negative

Normal, Necessity Inelastic Positive

Inferior, Necessity Inelastic Negative

Normal, Optional Elastic Positive

Inferior, Optional Elastic Negative