Saturday, October 3, 2015

YED - Income Elasticity

YED - Income Elasticity

YED - is the responsiveness of the Qd, of a good, to the change in the incomes, (Y) of people demanding the good. Income, (Y) elasticity determines whether the good is normal or inferior.


Formula for computation

Graph for Reference.
  • If YED is negative the good is an inferior good.
  • If YED is positive the good is a normal good.
  • If YED is positive but below one, the good is income inelastic (necessity)
  • If YED is positive but above one, the good is income elastic (luxury)
  • If YED = 0, a % change in income does not effect the Qd of the good
  • If YED = 1, a % change in income = a % change in Qd of the good (Unitary Elasticity)
Another graph for reference is the Engel's curve.
As income increase the Qd for a normal good is positively related, Qd increase.
AS income increases the Qd for an inferior good is negatively related, Qd decrease


Answer - (B) An increase in the average income f consumers and an increase in the price of a variable input.

So, YED of a normal good (positive and increasing with incomes) drives up price as demand increases (shifts right) and as an input cost/resource cost increases (Determinant of Supply) supply shifts leftward increasing the price of the good more.

Example 2)

Answer is (D) X is an inferior good and is a compliment to Y.

as the cross-price elasticity is negative, we understand that means the two goods are compliments
and as the YED (income elasticity of demand) is negative the good is an inferior good

Example 3)

(b) You must know that a negative coefficient is an inferior good and that as incomes rise less of the good is demanded. (leftward shift of the demand curve)

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