Significance of YED Sign and Magnitude
Elasticities of Demand
Syllabus requirement
Positive YED = normal goods; negative YED = inferior goods; YED > 1 = luxury, YED < 1 = necessity.
Summary
Income elasticity of demand (YED) measures how much quantity demanded changes when consumer income changes; both its sign and magnitude indicate the type of good (normal or inferior) and how strongly demand responds. A positive YED implies a normal good, a negative YED an inferior good, and the numeric size (less than, greater than, or equal to 1) shows whether demand is income-inelastic, income-elastic, or perfectly income-inelastic. Engel curves graph the relationship between income and quantity demanded and distinguish necessities (flatter curves) from luxuries (steeper curves). Knowing YED helps firms and governments anticipate how demand shifts during economic expansions or recessions.
