Income elasticity and changing demand
| English | 中文 | Pinyin |
|---|---|---|
| income elasticity of demand/ˈɪŋkʌm ɪlæˈstɪsɪti ɒv dɪˈmænd/ | 需求收入弹性 | xū qiú shōu rù tán xìng |
| inferior good/ɪnˈfɪərɪə ɡʊd/ | 劣等品 | liè děng pǐn |
A decision you can investigate
- After income rises, a family buys more train journeys but fewer low-cost instant meals.
- A rise in purchasing power can increase one product’s demand and reduce another’s.
Build the explanation
- Income elasticity of demand 需求收入弹性 (YED) is percentage quantity-demanded change divided by percentage income change. Positive YED indicates a normal good; negative YED indicates an inferior good 劣等品 for that group and income range.
- A luxury has YED above 1: demand rises more proportionately than income. Normal necessities often have positive YED below 1. Inferior describes an income response, not unsafe or defective quality.
Work through the evidence
- Income rises from 2000 to 2200 yuan, a 10% increase. Journey purchases rise from 20 to 23, a 15% increase: YED = 15/10 = 1.5.
- Instant-meal purchases fall from 10 to 8, a −20% change: YED = −20/10 = −2. Journeys are a luxury in this observation; meals are inferior in this observation.
Which value identifies a normal necessity?
A positive YED below 1 identifies an income-inelastic normal good; PED is different.
Test the limits
- Classification can change with consumers, income range and time. One household is not an entire market, and a simultaneous price change can confound the calculation.
- PED answers a price question; YED answers an income question. Positive YED does not imply price-inelastic demand.
Income falls 5% and demand for a product rises 10%. YED is
YED = 10/(−5) = −2, indicating an inferior good over this change.
An inferior good must be physically defective.
Inferior describes a negative income-demand relationship, not physical quality.
Apply and explain your answer
- What does YED = −2 mean in the meal example?
- A 1% income rise is associated with a 2% fall in quantity demanded over this observed change.
A firm selling an income-elastic luxury should expect, other factors unchanged,
YED above 1 describes relative demand growth, not automatic profit.
Use the terms precisely
- income elasticity of demand: Percentage quantity-demanded change divided by percentage income change.
- inferior good: A good whose demand falls as income rises, other relevant factors unchanged.
Match the terms to their meanings.
Each term describes a specific mechanism in this lesson.
Income rises from 2000 to 2200 yuan, a 10% increase. Journey purchases rise from 20 to 23, a 15% increase: YED = 15/10 = 1.5. Instant-meal purchases fall from 10 to 8, a −20% change: YED = −20/10 = −2. Journeys are a luxury in this observation; meals are inferior in this observation.
Classification can change with consumers, income range and time. One household is not an entire market, and a simultaneous price change can confound the calculation. PED answers a price question; YED answers an income question. Positive YED does not imply price-inelastic demand.
Income elasticity of demand (YED) is percentage quantity-demanded change divided by percentage income change. Positive YED indicates a normal good; negative YED indicates an inferior good for that group and income range.