Income Elasticity of Demand

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    A demand curve for a good shifts if income changes, but the direction and extent of the shift depends on the income elasticity of demand for that good.

    Income elasticity of demand (YED) measures the responsiveness of demand to a change in income.

    A normal good has a positive . As income rises, demand for a normal good rises. For example, chocolate, TVs and mobile phones etc.

    A luxury good has a positive . As income rises, demand for the luxury good rises a lot. The percentage change in demand is greater than the percentage change in income. For example, topbrands including Mercedes cars, Nike trainers, Dolce and Gabbana perfumes etc.

    A necessity has a positive . As income rises, demand for the necessity rises by only a small amount. The percentage change in demand is less than the percentage change in income. For example, milk, bread and water.

    An inferior good has a negative . As income rises, demand for an inferior good falls. For example, ‘economy’ food in supermarkets.

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