1.2 Income Elasticity of Demand (YED)

YED value is negative

Goods A is an *inferior* good

Profit

Total revenue - total cost TR - TVC - TFC

unrelated goods

goods that are not linked in their use

YED formula

(%∆Qx) ÷ (%∆Y)

inverse relationship

A change in the value of one variable leads to an opposite change in direction in the value of the other variable

Inferior good

A good the demand for which varies negatively with income. As income increases, the demand for the good decreases.

Normal good

A good the demand for which varies positively (or directly) with income; this means that as income increases, demand for the good increases.

Income elasticity of demand

A measure of how much the quantity demanded of a good responds to a change in consumers' income, calculated as the percentage change in quantity demanded divided by the percentage change in income

Luxury good

A normal good for which the income elasticity of demand is positive, and greater than 1, such that as income rises, consumers spend proportionally more on the good.

Necessity good

A normal good for which the income elasticity of demand is positive, and less than 1, such that as income rises, consumers spend proportionally less on the good.

positive correlation

A relationship between two variables such that they move in the same direction rival business a competitor.

demand curve

Downward-sloping graph that graphically shows the relationship between price and quantity demanded by showing the quantities demanded for a good at each possible price.

YED = *- *0.6

Good is *inferior*

YED = *+*1.3

Good is income *elastic*

YED = *+*0.5

Good is income *inelastic*

YED>1

Goods A is a *luxury*

YED<1

Goods A is a *necessity*

YED

Income elasticity of demand

Primary products

Involves the retrieval and production of raw materials, such as corn, coal, wood and iron. (A coal miner and a farmer would be workers in the primary sector.)

Services

Involves the supplying of services to consumers and businesses, such as baby-sitting, cinema and banking. (A shopkeeper and an accountant would be workers in the services sector.)

Manufacturing

Involves the transformation of raw or intermediate materials into goods e.g. manufacturing steel into cars, or textiles into clothing. (A builder and a dressmaker would be workers in the manufacturing sector.)

Total revenue

Price x quantity produced and sold

absolute value

The absolute value of a real number is equal to the numeric value of the number without regard to its sign (e.g -3 is 3).

quantity demanded

The amount of a good or service that a consumer is willing and able to purchase at a given price

pricing strategy

The decision made by a business as to what its price will be. Usually the general aim will be to increase total revenue and/or profit.

Business cycle

The fluctuation in economic activity that an economy experiences over a period of time. Basically defined in terms of periods of expansion or recession.

revenue

The income or sales that a business achieves in a period. Calculated by multiplying selling price per unit x units sold.

Income inelastic

When an income change causes a proportionately smaller change in quantity demanded. 0<YED<1

Income elastic

When an income change causes a proportionately smaller change in quantity demanded. YED<1