What is income elasticity of demand? [2]

Income elasticity of demand (YED) measures the responsiveness of the quantity demanded of a good to a change in the consumer's income. It is calculated using the formula:

$$\text{Income Elasticity of Demand (YED)}=\frac{\%\text{ change in quantity demanded}}{\%\text{ change in income}}$$

Key Points:

• Positive YED: Normal goods (e.g., luxury items, branded products). If income rises, demand increases.
• Negative YED: Inferior goods (e.g., second-hand clothes). If income rises, demand falls.
• YED > 1: Luxury goods (highly responsive to income changes).
• 0 < YED < 1: Necessities (less responsive to income changes).
• YED = 0: Income-independent goods (e.g., salt).

Mathematically, it is expressed as: $$\text{YED}=\frac{\Delta Q/Q}{\Delta Y/Y}$$ where $\Delta Q$ = change in quantity demanded, $Q$ = initial quantity, $\Delta Y$ = change in income, and $Y$ = initial income.