Income elasticity of demand (YED)
Income elasticity of demand and its determinants
Income elasticity of demand: measures the responsiveness of demand to a change in consumer’s income.
- Shifts demand curve due to changed income
Determinants:
- Normal goods: positive value of YED
- Inferior goods: negative value of YED
- Necessities: Income inelastic of demand
- Luxuries: Income elastic of demand
Applications of income elasticity of demand
Application:
- Firms: can predict the effect of a business cycle on sales
