IBEconomicsSLRevision Notes2. Microeconomics2.5 Income Elasticity of Demand (YED)2.5.1 Definition, Calculation & Illustration of YED

Definition, Calculation & Illustration of YED (SL IB Economics)

Revision Note

Steve Vorster

Expertise

Economics & Business Subject Lead

Definition & Calculation of YED

  • Changes in income result in changes to the demand for goods/services
    • Economists are interested in how much the quantity demanded will change for different products
  • Income elasticity of demand (YED) reveals how responsive the change in quantity demanded is to a change in income

Calculation of YED

  • YED can be calculated using the following formula

text YED =  end text fraction numerator percent sign space c h a n g e space i n space q u a n t i t y space d e m a n d e d over denominator percent sign space c h a n g e space i n space i n c o m e end fraction space equals space fraction numerator percent sign triangle space i n thin space Q D over denominator percent sign triangle i n space Y end fraction

Worked example

A consumer's income rises from SG$ 100 to SG$ 125 a week. They originally consumed 12 bubble teas but this increased to 15 bubble teas a week. Calculate the YED of the bubble teas  [2]

Step 1:  Calculate the % change in QD

  percent sign triangle QD space equals space fraction numerator 15 minus 12 over denominator 12 end fraction space cross times 100 percent sign triangle QD space equals space 25 percent sign 


Step 2: Calculate the % change in Y

percent sign triangle Y space equals space fraction numerator 125 space minus space 100 over denominator 100 end fraction space straight x space 100 percent sign triangle Y space equals space 25 percent sign


Step 3: Insert the above values in the YED formula

Y ED space equals space fraction numerator percent sign triangle space in thin space QD over denominator percent sign triangle in space straight Y end fraction Y ED space equals space 25 over 25 Y ED space equals space space 1

(Two marks for the correct answer or 1 mark for any correct working)

Interpreting YED Values

  • The YED value can be positive or negative and the value is important in determining the type of good
    • A good with a positive YED value is considered to be a normal good
      • Normal goods can be classified as necessities or luxuries
    • A good with a negative YED value is considered to be an inferior good

  • Engle curves are a model used to illustrate the relationship between income and the quantity demanded (QD)
    • Income is presented on the Y-axis and quantity demanded on the X-axis
        

The Value of YED Determines the type of good and Response to Changes in Income


Value
Type of Good
Explanation
Engel Curve

0→1

Necessity

  • Normal good - quantity demanded increases when income increases
  • Income inelastic which means that it is relatively unresponsive to a change in income
  • E.g. A 10% increase in income leads to a 3% increase in QD

2-5-1---interpreting-yed-values---necessity

YED > 1

Luxury

  • Normal good - quantity demanded increases when income increases
  • Income elastic which means that it is relatively responsive to a change in income
  • E.g. A 3% increase in income leads to a 10% increase in QD

2-5-1---interpreting-yed-values---luxury

YED < 0

Inferior Good

  • Quantity demanded decreases when income increases
  • E.g. Consumers switch from purchasing a supermarkets own brand cereal to Kellogg's cereal as income increases

2-5-1---interpreting-yed-values---inferior-good

Examiner Tip

Remember this distinction! With PED values the negative sign is always ignored. However for YED, the sign is integral to understanding if the good is a  normal (+) or inferior (-) good.

Factors that Influence YED

  • YED is influenced by any factors in an economy which change the wages of workers
    • During a recession wages usually fall and demand for inferior goods rises while demand for luxury goods falls
    • During a period of economic growth and rising wages, demand for luxury goods increases while demand for inferior goods decreases
    • Other influences on income include minimum wage legislation, taxation, increased international trade
Next topic

Did this page help you?

Steve Vorster

Author: Steve Vorster

Expertise: Economics & Business Subject Lead

Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.