Income Elasticity of Demand YED This measures the responsiveness of demand to a change in income. e.g.

if your income increase by 5 % and your demand for mobile phones increased 20% then the YED = 20/ 5 = 4. YED = % change in Q.D % change in Income INFERIOR GOOD This occurs when an increase in income leads to a fall in demand. Therefore YED<0. E.g. clothes from charity shops, cheap bread When your income increase you buy better quality goods NORMAL GOOD This occurs when an increase in income leads To an increase in demand for the good, Therefore YED>0 LUXURY GOOD This occurs when an increase in demand causes a bigger % increase in demand, therefore YED>1. Luxury goods will also be normal goods and we can say They will be income Elastic Income inelastic This means an increase in income leads to a smaller % increase in demand. Therefore 0> YED <1 Firms will make use of YED by producing more luxury goods during periods of economic growth, similarly there will be less demand for inferior goods. Income elasticity of demand (YED) In economics, the income elasticity of demand measures the responsiveness of the quantity demanded of a good to the change in the income of the people demanding the good. It is calculated as the ratio of the percent change in quantity demanded to the percent change in income. For example, if, in response to a 10% increase in income, the quantity of a good demanded increased by 20%, the income elasticity of demand would be 20%/10% = 2. Interpretation Inferior good's demand falls as consumer income increases. A negative income elasticity of demand is associated with inferior goods; an increase in income will lead to a fall in the quantity demanded and may lead to changes to more luxurious substitutes. A positive income elasticity of demand is associated with normal goods; an increase in income will lead to a rise in the quantity demanded. If income elasticity of demand of a commodity is less than 1, it is a necessity good. If the elasticity of demand is greater than 1, it is a luxury good or a superior good. A zero income elasticity (or inelastic) demand occurs when an increase in income is not associated with a change in the quantity demanded of a good. These would be sticky goods. Mathematical definition

More formally, the income elasticity of demand, , for a given Marshallian demand functionfor a good is or alternatively: This can be rewritten in the form: With income I, and vector of prices . Many necessities have an income elasticity of demand between zero and one: expenditure on these goods may increase with income, but not as fast as income does, so the proportion of expenditure on these goods falls as income rises. This observation for food is known as Engel's law.