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Income elasticity of demand

This measures the proportionate change in the quantity demanded of a good in response to a proportionate change in income. Essentially, it is a useful way of measuring the responsiveness of a change in the amount of a good demanded as a result of a change in their personal income. This is an important elasticity measure as income is one of the main driving forces behind consumption patterns of goods.

Below is the formula for calculating YED:

If the YED value is positive we classify the good in question as a normal good and therefore is a good that consumers enjoy to consume and wish to consume at higher quantities the more income is at their disposal.

If the YED value exceeds 1 we can classify the good as a luxury good as this is a good that would require a large swing in income to either encourage the consumer to purchase it in the first place or to stop consuming it and replace it with a good that is cheaper. 

If the YED value is negative we can classify the good in question as an inferior good. This is because if a person's income falls then the quantity demanded of these inferior goods increases as consumers switch expenditure away from normal goods to cheaper alternatives.

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