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Home / IB / Economics / SL / Revision Notes / 2. Microeconomics / 2.5 Income Elasticity of Demand (YED) / 2.5.1 Definition, Calculation & Illustration of YED


2.5.1 Definition, Calculation & Illustration of YED


Definition & Calculation of YED

  • Changes in income result in changes to the demand for goods/services
    • Economists are interested in how much the quantity demanded will change for different products
  • Income elasticity of demand (YED) reveals how responsive the change in quantity demanded is to a change in income

Calculation of YED

  • YED can be calculated using the following formula

text YED =  end text fraction numerator percent sign space c h a n g e space i n space q u a n t i t y space d e m a n d e d over denominator percent sign space c h a n g e space i n space i n c o m e end fraction space equals space fraction numerator percent sign triangle space i n thin space Q D over denominator percent sign triangle i n space Y end fraction

Worked Example

A consumer's income rises from SG$ 100 to SG$ 125 a week. They originally consumed 12 bubble teas but this increased to 15 bubble teas a week. Calculate the YED of the bubble teas  [2]

Step 1:  Calculate the % change in QD

  percent sign triangle QD space equals space fraction numerator 15 minus 12 over denominator 12 end fraction space cross times 100

percent sign triangle QD space equals space 25 percent sign 


Step 2: Calculate the % change in Y

percent sign triangle Y space equals space fraction numerator 125 space minus space 100 over denominator 100 end fraction space straight x space 100

percent sign triangle Y space equals space 25 percent sign


Step 3: Insert the above values in the YED formula

PED space equals space fraction numerator percent sign triangle space in thin space QD over denominator percent sign triangle in space straight Y end fraction

Y ED space equals space 25 over 25

Y ED space equals space space 1

(Two marks for the correct answer or 1 mark for any correct working)

Interpreting YED Values

  • The YED value can be positive or negative and the value is important in determining the type of good
    • A good with a positive YED value is considered to be a normal good
      • Normal goods can be classified as necessities or luxuries
    • A good with a negative YED value is considered to be an inferior good

  • Engle curves are a model used to illustrate the relationship between income and the quantity demanded (QD)
    • Income is presented on the Y-axis and quantity demanded on the X-axis
        

The Value of YED Determines the type of good and Response to Changes in Income


Value


Type of Good


Explanation


Engel Curve

0→1

Necessity

  • Normal good - quantity demanded increases when income increases
  • Income inelastic which means that it is relatively unresponsive to a change in income
  • E.g. A 10% increase in income leads to a 3% increase in QD

2-5-1---interpreting-yed-values---necessity

YED > 1

Luxury

  • Normal good - quantity demanded increases when income increases
  • Income elastic which means that it is relatively responsive to a change in income
  • E.g. A 3% increase in income leads to a 10% increase in QD

2-5-1---interpreting-yed-values---luxury

YED < 0

Inferior Good

  • Quantity demanded decreases when income increases
  • E.g. Consumers switch from purchasing a supermarkets own brand cereal to Kellogg's cereal as income increases

2-5-1---interpreting-yed-values---inferior-good

Exam Tip

Remember this distinction! With PED values the negative sign is always ignored. However for YED, the sign is integral to understanding if the good is a  normal (+) or inferior (-) good.

Factors that Influence YED

  • YED is influenced by any factors in an economy which change the wages of workers
    • During a recession wages usually fall and demand for inferior goods rises while demand for luxury goods falls
    • During a period of economic growth and rising wages, demand for luxury goods increases while demand for inferior goods decreases
    • Other influences on income include minimum wage legislation, taxation, increased international trade


  • 1. Introduction To Economics
    • 1.1 What Is Economics?
      • 1.1.1 Economics as a Social Science
        • 1.1.2 The Problem of Choice
          • 1.1.3 The Production Possibilities Curve Model (PPC)
            • 1.1.4 Modelling the Economy
            • 1.2 How Do Economists Approach The World?
              • 1.2.1 Economic Methodology
                • 1.2.2 Economic Thought
              • 2. Microeconomics
                • 2.1 Demand
                  • 2.1.1 Demand, Price & Quantity
                    • 2.1.2 Non-Price Determinants of Demand
                    • 2.2 Supply
                      • 2.2.1 Supply, Price & Quantity
                        • 2.2.2 Non-Price Determinants of Supply
                        • 2.3 Competitive Market Equilibrium
                          • 2.3.1 Market Equilibrium & Disequilibrium
                            • 2.3.2 Functions of the Price Mechanism
                              • 2.3.3 Consumer & Producer Surplus
                              • 2.4 Price Elasticity of Demand (PED)
                                • 2.4.1 Definition, Calculation & Determinants of PED
                                  • 2.4.2 The Significance of PED
                                  • 2.5 Income Elasticity of Demand (YED)
                                    • 2.5.1 Definition, Calculation & Illustration of YED
                                    • 2.6 Price Elasticity of Supply (PES)
                                      • 2.6.1 Definition, Calculation & Determinants of PES
                                      • 2.7 Role of Government In Microeconomics
                                        • 2.7.1 Reasons For Government Intervention In Markets
                                          • 2.7.2 Government Intervention: Indirect Taxes & Subsidies
                                            • 2.7.3 Government Intervention: Price Controls, Direct Provision & Regulation
                                            • 2.8 Market Failure: Externalities & Common Pool (Access) Resources
                                              • 2.8.1 Market Failure
                                                • 2.8.2 Negative Externalities
                                                  • 2.8.3 Positive Externalities
                                                    • 2.8.4 Common Pool (Access) Resources
                                                      • 2.8.5 Government Intervention to Address the Market Failure
                                                        • 2.8.6 Other Interventions to Address the Market Failure
                                                        • 2.9 Market Failure: Public Goods
                                                          • 2.9.1 Public Goods
                                                        • 3. Macroeconomics
                                                          • 3.1 Measuring Economic Activity
                                                            • 3.1.1 National Income & The Circular Flow of Income
                                                              • 3.1.2 National Income Terminology & Calculations
                                                                • 3.1.3 The Business Cycle
                                                                  • 3.1.4 Appropriateness of Using GDP/GNI to Measure Well-being
                                                                    • 3.1.5 Alternative Measures of Well-Being
                                                                    • 3.2 Variations in Economic Activity (AD & AS)
                                                                      • 3.2.1 Aggregate Demand (AD)
                                                                        • 3.2.2 Short-Run Aggregate Supply (SRAS)
                                                                          • 3.2.3 Alternative Views of Aggregate Supply (AS)
                                                                            • 3.2.4 Shifts of the Long-Run Aggregate Supply (LRAS)
                                                                              • 3.2.5 Macroeconomic Equilibrium
                                                                              • 3.3 Macroeconomic Objectives
                                                                                • 3.3.1 An Introduction to Macroeconomic Objectives
                                                                                  • 3.3.2 Economic Growth
                                                                                    • 3.3.3 Low Unemployment
                                                                                      • 3.3.4 Low & Stable Rate of Inflation
                                                                                        • 3.3.5 Potential Conflicts Between Macroeconomic Objectives
                                                                                        • 3.4 Inequality & Poverty
                                                                                          • 3.4.1 Measuring Inequality & Poverty
                                                                                            • 3.4.2 Causes of Inequality & Poverty
                                                                                              • 3.4.3 Using Taxation to Reduce Inequality & Poverty
                                                                                                • 3.4.4 Other Policies to Reduce Inequality & Poverty
                                                                                                • 3.5 Demand Management: Monetary Policy
                                                                                                  • 3.5.1 An Overview of Monetary Policy
                                                                                                  • 3.6 Demand Management: Fiscal Policy
                                                                                                    • 3.6.1 An Overview of Fiscal Policy
                                                                                                    • 3.7 Supply-Side Policies
                                                                                                      • 3.7.1 An Overview of Supply-Side Policies
                                                                                                        • 3.7.2 The Effectiveness of Supply-Side Policies
                                                                                                      • 4. The Global Economy
                                                                                                        • 4.1 Benefits of International Trade
                                                                                                          • 4.1.1 The Advantages of Free Trade
                                                                                                          • 4.2 Types of Trade Protection
                                                                                                            • 4.2.1 Tariffs
                                                                                                              • 4.2.2 Quotas
                                                                                                                • 4.2.3 Export Subsidies
                                                                                                                  • 4.2.4 Administrative Barriers
                                                                                                                  • 4.3 Arguments For & Against Trade Protection
                                                                                                                    • 4.3.1 Arguments For & Against Trade Protection
                                                                                                                    • 4.4 Economic Integration
                                                                                                                      • 4.4.1 Understanding Economic Integration
                                                                                                                        • 4.4.2 Types of Trading Blocs
                                                                                                                          • 4.4.3 The World Trade Organisation (WTO)
                                                                                                                          • 4.5 Exchange Rates
                                                                                                                            • 4.5.1 Types of Exchange Rate Systems
                                                                                                                              • 4.5.2 Causes & Consequences of Exchange Rate Fluctuations
                                                                                                                              • 4.6 Balance of Payments
                                                                                                                                • 4.6.1 Components of the Balance of Payments
                                                                                                                                • 4.7 Sustainable Development
                                                                                                                                  • 4.7.1 The Sustainable Development Goals
                                                                                                                                  • 4.8 Measuring Economic Development
                                                                                                                                    • 4.8.1 Single Indicators of Development
                                                                                                                                      • 4.8.2 Composite Indicators of Development
                                                                                                                                        • 4.8.3 Evaluating the Different Approaches
                                                                                                                                        • 4.9 Barriers to Economic Growth & Development
                                                                                                                                          • 4.9.1 Poverty Traps
                                                                                                                                            • 4.9.2 Economic, Political & Social Barriers
                                                                                                                                            • 4.10 Economic Growth & Development Strategies
                                                                                                                                              • 4.10.1 Trade Strategies, Diversification & Social Enterprise
                                                                                                                                                • 4.10.2 Market-Based & Interventionist Policies
                                                                                                                                                  • 4.10.3 Merit Goods & Inward Foreign Direct Investment
                                                                                                                                                    • 4.10.4 Foreign Aid & Development Assistance
                                                                                                                                                      • 4.10.5 Institutional Change
                                                                                                                                                        • 4.10.6 Evaluating Market Orientated Approaches Versus Government Intervention
                                                                                                                                                          • 4.10.7 Progress Towards Sustainable Development Goals

                                                                                                                                                        Author: Steve



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