Income Elasticity of Demand - YED

Income elasticity of demand measures how responsive Demand is when income is varied.

\(\text{YED} =\frac{\%\Delta QD}{\%\Delta Y}\)

Y stands for income.

<---- -2 ---- -1 ----- 0 ----- 1 ----- 2 ------>
       Inferior        |     Normal    | Luxury

Inferior Goods

Inferior goods have a YED of less than 0. This means that when people's incomes increase, they buy less of the good.

For example:

• Own-brand goods

Normal Goods

Normal goods are ones that increase slightly when people incomes increase. They will buy more, but not necessarily a lot more.

For example:

• Branded goods

Luxury Goods

Normal goods are ones that increase significantly when people's incomes increase. They will buy a lot more. They will increase % the amount they buy by more than double their increase in income.

This makes sense for things like holidays, as if someone gets a 10% income rise, all of that income is not being used, so they will have a lot more to spend on luxuries. Also bear in mind that this would be a 20% increase in luxury goods (assuming they have YED of 2), which won't be all of their spending, so it will not be 20% of what they are spending.

• Holidays
• Hotels