e.g. if your income increase by 5 % and your demand for mobile phones increased 20% then the YED = 20/ 5 = 4. YED = % change in Q.D % change in Income Definition of INFERIOR GOOD This occurs when an increase in income leads to a fall in demand, therefore YED<0. E.g. clothes from charity shops, cheap bread When your income increase you buy better quality goods Definition of NORMAL GOOD This occurs when an increase in income leads to an increase in demand for the good, Therefore YED>0 Definition of LUXURY GOOD This occurs when an increase in income causes a bigger % increase in demand, therefore YED>1. Luxury goods will also be normal goods and we can say they will be income Elastic Income inelastic .This means an increase in income leads to a smaller % increase in demand. Therefore 0> YED <1 Firms will make use of YED by producing more luxury goods during periods of economic growth, similarly there will be less demand for inferior goods. YED > 1 = Luxury good An increase in income causes a bigger % increase in demand (elastic) – YED > 0 = Normal good An increase in income leads to increase in demand (inelastic) – YED < 0 = Inferior good An increase in income leads to a fall in demand (inelastic) – YED < -1 = Inferior good An increase in income leads to a bigger % fall in demand (elastic) – Price elasticity of demand is? (2) What is the relationship between price and demand? (2) PED = -2. If price is lowered by 5%, what will demand do and revenue do? (2) PED = -0.7. If price is increased by 10%, what will demand and revenue do? (2)
e.g. if your income increase by 5 % and your demand for mobile phones increased 20% then the YED = 20/ 5 = 4. YED = % change in Q.D % change in Income Definition of INFERIOR GOOD This occurs when an increase in income leads to a fall in demand, therefore YED<0. E.g. clothes from charity shops, cheap bread When your income increase you buy better quality goods Definition of NORMAL GOOD This occurs when an increase in income leads to an increase in demand for the good, Therefore YED>0 Definition of LUXURY GOOD This occurs when an increase in income causes a bigger % increase in demand, therefore YED>1. Luxury goods will also be normal goods and we can say they will be income Elastic Income inelastic .This means an increase in income leads to a smaller % increase in demand. Therefore 0> YED <1 Firms will make use of YED by producing more luxury goods during periods of economic growth, similarly there will be less demand for inferior goods. YED > 1 = Luxury good – An increase in income causes a bigger % increase in demand (elastic) YED > 0 = Normal good – An increase in income leads to increase in demand (inelastic) YED < 0 = Inferior good – An increase in income leads to a fall in demand (inelastic) YED < -1 = Inferior good – An increase in income leads to a bigger % fall in demand (elastic) Price elasticity of demand is? (2) What is the relationship between price and demand? (2) PED = -2. If price is lowered by 5%, what will demand do and revenue do? (2) PED = -0.7. If price is increased by 10%, what will demand and revenue do? (2)
elasticity_factsheet.docx