Cambridge International as and a level Economics Ebook

Income elasticity of demand (YED): 
a numerical measure 
of the responsiveness of the quantity demanded following a 
change in income.
KEY TERM
It is important to recognise that the relationship between 
income and demand changes may not always be positive. 
If an increase in income leads to an increase in the 
quantity demanded (or a decrease in income leads to 
a decrease in the quantity demanded), then there is a 
positive relationship and the product is classifi ed as 
normal. Th
e YED has a positive value. However, there are 
some products, inferior goods, which exhibit a negative 
relationship between income and demand. An increase in 
income would cause a decrease in the quantity demanded 
(a decrease in income would cause an increase in the 
quantity demanded). Here, the YED has a negative value. 
So the sign that precedes the YED tells you the nature of 
the relationship between income and the quantity that is 
demanded; the numerical value tells you the strength of 
that relationship.
For example, there has been a 2% increase in consumer 
income and that has led to the changes in demand shown 
in 
Table 2.6
.
Original demand 
(per period of time)
New demand
Product A
100 units at the 
current price ($10)
103 units at the same 
price ($10)
Product B
100 units at the 
current price ($10)
99 units at the same 
price ($10)
Product C
100 units at the 
current price ($10)
101 units at the same 
price ($10)
Table 2.6 
Change in demand
YED of A 
=
3% increase in demand
2% increase in income
=
+
1.5 (normal good – elastic response)
YED of B 
=
1% decrease in demand
2% increase in income
=
−
0.5 (inferior good – inelastic response)
YED of C 
= 
1% increase in demand
2% increase in income
=
+
0.5 (normal good – inelastic response)
TOP TIP
Knowing whether the estimate of income elasticity of 
demand is positive or negative is essential.