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

$YED = \frac{% c h a n g e i n q u a n t i t y d e m a n d e d}{% c h a n g e i n i n c o m e} = \frac{% △ i n Q D}{% △ i n Y}$

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

$% △ QD = \frac{15 - 12}{12} \times 100 % △ QD = 25 %$

Step 2: Calculate the % change in Y

$% △ Y = \frac{125 - 100}{100} x 100 % △ Y = 25 %$

Step 3: Insert the above values in the YED formula

$PED = \frac{% △ in QD}{% △ in Y} Y ED = \frac{25}{25} Y ED = 1$

(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

SL IB Economics

Revision Notes

2.5.1 Definition, Calculation & Illustration of YED

Definition & Calculation of YED

Calculation of YED

Worked Example

Interpreting YED Values

Exam Tip

Factors that Influence YED

Author: Steve

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