Income Elasticity of Demand
Income elasticity of Demand (YED) measures how the change in household income impacts consumers level of quantity demanded a certain good or service. When calculating YED it is important to remember to include any negative values in the formula. The final result of YED can be used to calculate the classification of the good or service being purchased, as it determines whether it is a normal product, a luxury, a necessity or an inferior good.
YED outcomes and factors
The table above shows how the values of YED change represent to show the income elasticity of different goods. There are many people who are interested in this figure:
Firms: Firms need to study how the level of household incomes influences sales. This allows businesses to alter their prices to maximise profits during different stages of the business cycle.
Households: The different amount of incomes a household receives will influence their budgets and spending habits.
Government: The sectors of the economy will be altered as incomes change and grow with economic growth. Additionally, fiscal and monetary policy can be used to impact household incomes through taxes and interest rates to improve consumer confidence and control changes in income.