A negative YED is associated with inferior goods, i.e. an increase in income will lead to an increase in demand for the good. A positive YED is associated with normal goods, i.e. YED can take on positive and negative values. For example, if a 10% increase in income causes you to spend 20% more on gourmet coffee, your YED for gourmet coffee is 2. Income elasticity of demand (YED) measures the degree of responsiveness of demand to a change in income. Let me share with you one concept to illustrate this – income elasticity of demand (YED). More importantly, it may also lead us to reflect on whether there is a need to change the way we think and act, especially if we seek to live life a bit more meaningfully. In this way, it provides insights to help us gain a better understanding of why we may behave in a certain way and what we value. Usually, when the economic growth is good and there is an increase in consumers’ income, the demand for inferior goods reduces and there is an inward swing of the demand curve.Ĭonsequently, when the incomes reduce and price of goods increases because of recession, then the demand for inferior goods increases, thereby causing an outward swing of the demand curve.In economics, theories and concepts are used to help us predict how people will generally behave given a change in economic circumstances. Public transport, in this case, is an inferior good. Inferior goods are called inferior because they usually have superior alternatives.įor instance, if a consumer’s income increases, then he/she might start taking a cab instead of opting for public transport.
If the consumers’ income increases, they demand less of these goods. Inferior goods have a negative income elasticity that is YED is less than 0. However, it is important to note that the concept of luxury is contextual and it depends on the circumstances of consumers. The percentage of change in demand is more in proportion to the change in income. For instance, if a consumer’s income increases, he/she may invest or purchase a high-end mobile or an HD television.
Examples of luxury goods include high-end electronics or jewellery. Luxuries, on the other hand, are highly income-elastic. The percentage of change in the demand for these products is less in proportion to the percentage of change in consumers’ income. Normal necessities include basic needs such as milk, fuel, or medicines.įactors such as a change in price or change in consumers’ income do not affect the demand for necessary goods. The income elasticity coefficient or YED for normal necessities is between 0 and 1. Normal necessities have a positive but low income-elasticity compared to luxurious goods. However, normal goods can further be broken down into normal necessities and normal luxuries. That is, when the consumers’ income increases, the demand for these goods also increases. When YED is more than zero, the product is income-elastic. Now, the coefficient for measuring income elasticity is YED. The income elasticity of demand for a product can elastic or inelastic based on its category-whether it is an inferior good or a normal good. The income elasticity of demand for a particular product can be negative or positive, or even unresponsive.
Now, we can measure the income elasticity of demand for different products by categorizing them as inferior goods and normal goods. The higher the income elasticity of demand for a specific product, the more responsive it becomes the change in consumers’ income. Income Elasticity of Demand (YED) = % change in quantity demanded / % change in income You can express the income elasticity of demand mathematically as follows: The income elasticity of demand measures how the change in a consumer’s income affects the demand for a specific product. The elasticity of demand measures how factors such as price and income affect the demand for a product.
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