What is likely to happen to the demand for these products when incomes rise by 15%?

Income Elasticity YED measures the responsiveness of quantity demanded to a change in income it is the mathematical relationship between ∆Y & ∆Qd YED = %ΔQd % ΔY If a change in income significantly alters the Qd, then YED is said to be “relatively elastic.” If a change in income does not have much affect on Qd, then YED is said to be “relatively inelastic.”

Y Q YED Tells us about the type of good: - for all ‘normal’ goods, YED will be positive (as we earn more, we buy more) -for ‘inferior’ goods, YED will be negative (as we earn more, we buy less) Income Elasticity Normal good Inferior good

Y Q D Y0Y0 Y1Y1 Q0Q0 Q1Q1 Income Inelastic Demand - a large income change results in only a small change in Qd - 0<YED <1 - found on ‘necessities’ (we buy the same amount regardless of income changes) Income Inelastic Demand

Y Q D Y0Y0 Y1Y1 Q0Q0 Q1Q1 Income Elastic Demand - a small income change results in a large change in Qd - 1 < YED - found on ‘optional’ products (a little boost in income suddenly adds these items to our basket) Income Elastic Demand

Income Elasticity – Types of Goods ElasticityPositive / Negative Normal, NecessityInelasticPositive Inferior, NecessityInelasticNegative Normal, OptionalElasticPositive Inferior, OptionalElasticNegative