IBEconomicsDPSLFlashcards2. Microeconomics2.5 Income Elasticity of Demand (YED)

2.5 Income Elasticity of Demand (YED) (DP IB Economics: SL): Flashcards

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  • Define income elasticity of demand (YED).

    Income elasticity of demand (YED) measures how responsive the quantity demanded of a good is to a change in income.

  • What is the formula for income elasticity of demand (YED)?

    The YED is calculated as the percentage change in quantity demanded divided by the percentage change in income.

  • Define normal good.

    A normal good has a positive YED value, meaning quantity demanded increases as income increases.

  • True or False?

    For YED, the negative sign is ignored, just as it is for PED.

    False.

    For YED the sign is integral: a positive value indicates a normal good and a negative value an inferior good.

  • A normal good with a YED value between 0 and 1 is classified as a                    .

    A normal good with a YED value between 0 and 1 is classified as a necessity.

  • Define inferior good.

    An inferior good has a negative YED value, meaning quantity demanded decreases as income increases.

  • What YED value indicates a luxury good?

    A luxury good has a YED greater than 1, meaning demand is income elastic.

  • Define Engel curve.

    An Engel curve is a model used to illustrate the relationship between income and the quantity demanded of a good.

  • A 3% rise in income causes a 10% rise in quantity demanded. What is the YED?

    The YED is approximately 3.33, calculated as 10% divided by 3%.

  • True or False?

    During a recession, demand for luxury goods usually rises.

    False.

    During a recession wages usually fall, so demand for inferior goods rises while demand for luxury goods falls.

  • Besides wages, name one influence on income that affects YED.

    Influences on income include minimum wage legislation, taxation and increased international trade.

  • Firms use YED to understand consumer behaviour and to adapt to changes in the sectoral                    of the economy.

    Firms use YED to understand consumer behaviour and to adapt to changes in the sectoral structure of the economy.

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