Income Elasticity of Demand (YED)
Elasticities of Demand
AO2·AO4·Diagram required
Syllabus requirement
Measures the responsiveness of demand to a change in income. Differentiates between inferior, normal, and luxury goods.
Assessment objectives
AO2 Application and AnalysisAO4 Use of Appropriate Skills
Required diagram: Engel curve showing positive YED (normal goods), negative YED (inferior goods), and the difference between necessities (YED < 1) and luxuries (YED > 1).
Summary
Income elasticity of demand (YED) measures how responsive the quantity demanded of a good or service is to changes in consumers' real income. It distinguishes normal goods (positive YED), including necessities (0<YED<1) and luxuries (YED>1), from inferior goods (negative YED), and is illustrated with Engel curves showing positive slopes for normal goods and negative slopes for inferior goods. Understanding YED helps predict how demand will change during economic expansions or recessions and guides business and policy decisions.
