1. Income Elasticity of Demand (YED)

2. Income Elasticity of Demand
The income elasticity of demand measures the responsiveness of demand to a change in income.
Income elasticity of demand = change in demand
change in income
Q2 - Q1 Q1
______
Y2 – Y1 Y1

3. Income elasticity
Measures the relationship between changes in consumer income and the sales of a good.
It is used to classify goods as "normal" or "inferior".
Goods with an income elasticity greater than 1 can be classified as luxuries instead of necessities; but only the consumer's judgment matters.

4. Normal Goods
In economics, a normal good is any good for which demand increases when income increases, i.e. with a positive income elasticity of demand.
Examples: Whole wheat, organic pasta noodles are an example of a normal good.

5. Inferior Good
In economics, an inferior good is a good whose demand decreases when consumer income rises (or demand rises when consumer income decreases), unlike normal goods, for which the opposite is observed. Normal goods are those for which demand rises as consumer income rises.
Goods like canned soups and vegetables are inferior goods.

6. Calculating Income Elasticity of Demand (Normal Good)
Time / Period
Winsor Estates Residents
Year
2016
2017
Months
Chicken Demand (Lbs)
Average Annual Income (G$)
Chicken Demand (Lbs)
Jan
50,000
$ ,000,000
56100
$ ,660,000
Feb
56,000
$ ,712,000
56123
$ ,673,800
Formula
6,000
50,000
___________
3,712,000
30,000,000
0.12/
56,000 – 50,000
50,000
_______________
33,712,000 – 30,000,000
30,000,000
Q2 - Q1 Q1
______
Y2 – Y1 Y1 = = =
0.9698

7. Calculating Income Elasticity of Demand (Inferior Good)
Republic Park Residents
2016
2017
Production Demand (Lbs)
Income (G$)
Production demand (Lbs)
45000
$ ,090,000
46123
$ ,766,046
40000
$ ,200,000
38236
$ ,588,800
Formula
-5,000
45,000
___________
4,110,000
27,090,000
40,000 – 45,000
45,000
_______________
31,200,000 – 27,090,000
27,090,000
-0.11/0.152 =
Q2 - Q1 Q1
______
Y2 – Y1 Y1 = =

8. Interpreting the signs.
Note the following:
If the sign of the answer is + this means it is a Normal good
If the sign of the answer is - this means it is a Inferior good

9. Normal Goods Normal Goods have + sign
INCOME QUANTITY
Normal Goods have + sign
Goods are said to be normal if the quantity demanded decreases and the income received decreases.
Goods are said to be normal if the quantity demanded decreases and the income received decreases
INCOME QUANTITY

10. Inferior Goods Inferior Goods have a – Sign
INCOME QUANTITY
Inferior Goods have a – Sign
Goods are said to be inferior if the quantity demanded increases and the income received decreases.
INCOME QUANTITY

11. Luxury Good
In economics, a luxury good (or upmarket good) is a good for which demand increases more than proportionally as income rises, and is a contrast to a "necessity good", where demand increases proportionally less than income.

12. Complementary Good
Material or good whose use is interrelated with the use of an associated or paired good such that a demand for one (tires, for example) generates demand for the other (gasoline, for example).
If the price of one good falls and people buy more of it, they will usually buy more of the complementary good also whether or not its price also falls.
Similarly, if the price of one good rises and reduces its demand, it may reduce the demand for the paired good as well. Also called complementary product.

13. Substitute Good
 Substitute goods are two alternative goods that could be used for the same purpose.
Substitute present the consumer with alternative choices
If the price of one good increases, then the demand for the substitute is likely to rise
Therefore, substitutes have a positive cross elasticity.

14. Graphs showing substitutes
In the diagram on the left, there is a fall in the price of Android Phones causing consumers to demand more. (movement along the demand curve).
As a result, there is a fall in demand for the substitute (Apple iPhone) leading to less demand.