YED – definition

Income elasticity of demand refers to the responsiveness of demand for a good to a change in the income of consumers. It is shown by:

% Change in quantity demanded
% Change in income

Hence, if a consumer has an income of £50,000 and takes 2 holidays a year, and following an increase in income to £60,000, take 2 more holidays, then YED is:

+100
+20

Which gives a YED value of (+) 5. The positive sign shows that the goods (holidays) are normal goods, and the value (5) is much greater than 1, which means that holidays are luxury goods. When the relationship is negative, the goods are ‘inferior’ goods.


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