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Income elasticity of demand Edexcel International GCSE Economics revision

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In plain words

When people's incomes rise, they buy more of most things, a lot more of some, and less of a few. Income elasticity of demand (YED) measures how demand for a product responds to a change in income.

It tells a firm what will happen to its sales when the economy grows or goes into a recession.

5 things to know

  1. YED = percentage change in quantity demanded ÷ percentage change in income.
  2. A positive YED means a normal good: demand rises when income rises.
  3. A YED greater than 1 means a luxury good: demand rises by a bigger percentage than income.
  4. A negative YED means an inferior good: demand falls when income rises, because people switch to something better.
  5. Firms selling luxuries do well when incomes rise and badly in a recession. Firms selling inferior goods may do better in a recession.

Worked example

Incomes rise by 5% and the demand for bus journeys falls by 2%. Calculate the YED and state what kind of good bus travel is.

  1. YED = percentage change in quantity demanded ÷ percentage change in income.
  2. YED = −2 ÷ 5 = −0.4.
  3. It is negative, so bus travel is an inferior good: as incomes rise, some people switch to cars.

Tips and tricks

  • The sign matters here, unlike PED. Positive is a normal good, negative is an inferior good. Always write the sign.
  • "Inferior" is not about quality. It only means people buy less of it as they get richer.
5 questions, about 2 minutes.

It lands in your notebook with its questions as flashcards.

Income elasticity of demand: 5 questions and answers

These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.

  1. A YED of −0.8 shows that the product is
    • a luxury good
    • a normal good
    • an inferior good (the answer)
    • a free good

    A negative YED means demand falls as income rises.

  2. Incomes rise by 10% and demand for a product rises by 3%. What is the YED?
    • +0.3 (the answer)
    • −0.3
    • +3.3
    • +30

    3 ÷ 10 = 0.3. It is positive and less than 1: a normal good that is not a luxury.

  3. Which product is most likely to have a YED greater than 1?
    • bread
    • salt
    • foreign holidays (the answer)
    • second-hand clothes

    Holidays are a luxury: spending on them rises faster than income.

  4. In a recession, incomes fall. Which firm is most likely to see its sales rise?
    • a seller of sports cars
    • a jeweller
    • a seller of an inferior good (the answer)
    • a seller of a luxury good

    Demand for inferior goods rises when incomes fall.

  5. The YED for a product is +1.5. Incomes rise by 4%. What happens to demand?
    • It rises by 2.7%.
    • It rises by 5.5%.
    • It rises by 6%. (the answer)
    • It falls by 6%.

    Percentage change in demand = YED × percentage change in income = 1.5 × 4 = 6%.

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