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2.5.7—Income elasticity of demand

Syllabus
First assessment 2022
Objective
2.5.7
Level
HL

Income elasticity classifies demand across the income cycle

Income elasticity classifies demand across the income cycle.

YED=% change in quantity demanded/% change in income; positive values indicate normal goods and negative values inferior goods.

Example

If income rises 8% and demand for restaurant meals rises 12%, YED=1.5, a normal income-elastic good.

State the sign and magnitude, then connect it to forecasting or consumption patterns.

YED can differ across households and income ranges; it is not a permanent label for a product.

YED classes: YED<0YED<0 inferior; 0<YED<10<YED<1 normal and income-inelastic, commonly necessities; YED>1YED>1 normal and income-elastic, commonly services or luxuries. An Engel curve plots income vertically or horizontally as labelled against quantity demanded: necessities rise less than proportionately, luxuries more than proportionately, and inferior-good demand falls over the relevant income range. Rearrange the formula to find a missing percentage change.