Income Elasticity of Demand (YED)SL
MicroeconomicsA diagram illustrating different values of income elasticity of demand (YED) and how quantity demanded responds to changes in income for inferior, normal, and luxury goods.
Curves and elements
- inferior good
- Inferior Good (YED < 0): Demand falls as income rises.
- normal good
- Normal Good (0 < YED < 1): Demand rises with income but less than proportionally.
- luxury good
- Luxury Good (YED > 1): Demand rises more than proportionally as income increases.
- income axis
- Income Axis: Measures changes in consumer income.
- quantity axis
- Quantity Demanded Axis: Measures the quantity demanded of the good.
Key explanations
- 1
Income elasticity of demand (YED) measures the responsiveness of quantity demanded to a change in consumer income.
- 2
For an inferior good, YED is negative (YED < 0), meaning that as income rises, quantity demanded falls.
- 3
For a normal good, YED is positive but less than 1 (0 < YED < 1), so quantity demanded rises with income but at a proportionally smaller rate.
- 4
For a luxury good, YED is greater than 1 (YED > 1), meaning quantity demanded increases more than proportionally as income rises.
- 5
The steeper the slope of the income–quantity relationship, the more responsive demand is to changes in income.
Example exam question
Using a diagram, explain how income elasticity of demand differs for inferior, normal, and luxury goods.
Show example answer
In the diagram, income is shown on the vertical axis and quantity demanded on the horizontal axis. For inferior goods, the curve slopes downward, showing that higher income leads to lower demand. Normal goods have an upward-sloping curve with a moderate slope, indicating demand rises as income increases. Luxury goods have a steeper upward-sloping curve, showing that demand increases more than proportionally with income. These differences reflect negative, low positive, and high positive YED values respectively.
