Demand extends or contracts respectively with a fall or rise in price.

This qual
ity of demand by virtue of which it changes (increases or decreases) when price
changes (decreases or increases) is called Elasticity of Demand.
This change, sensitiveness or responsiveness, may be small or great. Take the ca
se of salt. Even a big fall in its price may not induce an appreciable ex apprec
iable extension in its demand. On the other hand, a slight fall in the price of
oranges may cause a considerable extension in their demand. That is why we say t
hat the demand in the former case is inelastic and in the latter case it is elastic .

Income Elasticity of Demand YED

This measures the responsiveness of demand to a change in income.
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
Defintion 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 demand 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 econo
mic growth, similarly there will be less demand for inferior goods.

The income elasticity of demand is the ratio of the percentage change in demand t
o the percentage change in income.
Normal goods have a positive income elasticity of demand (as income increases, th

e quantity demanded increases).

Inferior goods have a negative income elasticity of demand (as income increases,
the quantity demanded decreases).

Necessary Good
A type of normal good. An increase in income leads to a smaller than proportiona
l increase in the quantity demanded.
Superior Good
A type of normal good. Demand increases more than proportionally as income riseT
he income elasticity of demand (YED) measures the responsiveness of demand for a
good to a change in the income of the people demanding that good, ceteris parib
us. It is calculated as the ratio of the percentage change in demand to the perc
entage change in income:
YED=%changeinquantitydemanded%changeinrealincome
If an increase in income leads to an increase in demand, the income elasticity o
f that good or service is positive. A positive income elasticity is associated w
ith normal goods. In contrast, if a rise in income leads to a decrease in demand
, the good or service has a negative income elasticity of demand. A negative inc
ome elasticity is associated with inferior goods.
In all, there are five types of income elasticity of demand :

Income Elasticity of Demand

Income elasticity of demand measures the percentage change in quantity demanded
as income changes.
High income elasticity of demand (YED>1): An increase in income is accompanied b
y a proportionally larger increase in quantity demanded. This is typical of a lu
xury or superior good.
Unitary income elasticity of demand (YED=1): An increase in income is accompanied
by a proportional increase in quantity demanded.
Low income elasticity of demand (YED<1): An increase in income is accompanied by
less than a proportional increase in quantity demanded. This is characteristic o
f a necessary good.
Zero income elasticity of demand (YED=0): A change in income has no effect on the
quantity bought. These are called sticky goods.
Negative income elasticity of demand (YED<0): An increase in income is accompanie
d by a decrease in the quantity demanded. This is an inferior good (all other go
ods are normal goods). The consumer may be selecting more luxurious substitutes
as a result of the increase in income.