Income Elasticity of Demand (YED)

#topic/econ #method/formula

Definition

Income Elasticity of Demand (YED) measures how sensitive demand is to a change in income.

It is used to determine whether a good is normal or inferior.

Formula

Y E D = \frac{% change in quantity demanded}{% change in income}

Interpretation

YED > 0 → Normal good (direct relationship)
YED < 0 → Inferior good (inverse relationship)

Examples

Normal goods: electronics, restaurant meals
Inferior goods: instant noodles, low-cost Substitutes