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Income Elasticity of Demand

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Income Elasticity of Demand

  1. 1. AS Economics Income Elasticity of Demand Learning Objectives To understand how changes in income can affect the quantity demanded To be able to calculate YED
  2. 2. Income Elasticity of Demand (YED) YED measures the responsiveness of demand to changes in income Formulae: YED = Percentage change in the quantity demanded Percentage change in income
  3. 3. Income Elasticity of Demand (YED) YED measures the responsiveness of demand to changes in income YED = Percentage change in the quantity demanded Percentage change in income or ∆Q Q ÷ ∆Y Calculate YED for each of the following: 1. An increase in average income of 12% causes a fall in demand for Tesco Value products of 18% 2. A fall in average income from £22 000 to £20 000 per year causes a fall in demand for Tesco Finest products from 8000 to 6000 units Y
  4. 4. Income Elasticity of Demand (YED) YED measures the responsiveness of demand to changes in income YED = Percentage change in the quantity demanded Percentage change in income or Interpreting YED results: Positive YED: A normal good – as income rises the quantity demanded rises E.g. most goods are normal goods Negative YED: An inferior good – as income rises the quantity demanded falls E.g. value products, bus tickets ∆Q Q ÷ ∆Y Y
  5. 5. Income Elasticity of Demand (YED) YED measures the responsiveness of demand to changes in income Percentage change in the quantity demanded YED = Percentage change in income Normal Goods Y 0 or ∆Q Q ÷ Inferior Goods Y D1 Q 0 D1 Q ∆Y Y
  6. 6. Income Elasticity of Demand (YED) YED measures the responsiveness of demand to changes in income YED = Percentage change in the quantity demanded Percentage change in income Positive YED = normal good or ∆Q Q ÷ ∆Y Y Negative YED = inferior good 1. Average income rises 4% demand for bus tickets falls 2%, train tickets rise 6% and cars 12%. Calculate YED for each good. 2. Average income is £24 000, it has increased by 2.5%. The demand for champagne increases 10% from 100 000 units. Calculate YED. 3. Beef has a YED of +4. Calculate the change in income that would result in a 20% fall in demand for beef.
  7. 7. Income Elasticity of Demand (YED) YED measures the responsiveness of demand to changes in income YED = Percentage change in the quantity demanded Percentage change in income Positive YED = normal good or ∆Q Q ÷ ∆Y Y Negative YED = inferior good 1. Average income rises 4% demand for bus tickets falls 2%, train tickets rise 6% and cars 12%. Calculate YED for each good. 2. Average income is £24 000, it has increased by 2.5%. The demand for champagne increases 10% from 100 000 units. Calculate YED. 3. Beef has a YED of +4. Calculate the change in income that would result in a 20% fall in demand for beef.

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