Income elasticity of demand (YED) = % change in quantity demanded ÷ % change in income. Its sign tells you the type of good; its size tells you how strongly demand reacts.
Income rises 20%: three kinds of good
A luxury: eating out
Demand rises by more than 20%, so YED is above 1.
A necessity: bread
Demand rises by less than 20%, so YED is between 0 and 1.
An inferior good: instant noodles
Demand falls, as people switch to something better, so YED is negative.
The points to remember
- Luxuries and necessities are both normal goods: YED is positive.
- Inferior goods: YED is negative.
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A change in income shifts the demand curve. How far, and which way, depends on YED.
Our example (made-up numbers): a family's income rises 20%, from €3,000 to €3,600 a month
| Good | Before | After | Change | YED |
|---|---|---|---|---|
| Eating out | 4 | 6 | +50% | 2.5 |
| Bread | 10 | 11 | +10% | 0.5 |
| Instant noodles | 20 | 16 | −20% | −1 |
Animated graph
Watch the graph build step by step in study mode.
Remember it as: Luxury: a big shift right. Necessity: a small one. Inferior: a shift left.
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Paper 2 asks for a YED calculation almost every year, for 2 marks.
Calculate YED in three steps
% change in quantity
Meals out rise from 4 to 5 a month: (5 − 4) ÷ 4 × 100 = +25%
% change in income
€3,000 to €3,300: (3,300 − 3,000) ÷ 3,000 × 100 = +10%
Divide: quantity over income
YED = 25 ÷ 10 = 2.5: positive and above 1, a luxury
How a 2-mark YED calculation is marked
| You write | Marks |
|---|---|
| Valid working and the answer | 2 |
| The answer only, no working | 1 |
| The formula alone, or upside down (income on top) | 0 |
The points to remember
- Quantity goes on top; income underneath.
- Keep the sign: a minus means an inferior good.
- Backwards: % change in quantity = YED × % change in income.
As a country gets richer, YED decides which parts of the economy grow fastest.
Why YED matters
Food and raw materials
YED is low, so demand grows slowly as incomes rise and farming's share of the economy shrinks.
Manufactured goods
Cars and phones grow with incomes, then level off once most homes have them.
Services
Holidays, eating out and health care have high YED, so spending moves to them.
A recession
Incomes fall: luxuries lose the most sales, inferior goods sell more, so firms plan ahead.
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Paper 1 asked this in November 2023, as part (a) for 10 marks.
Explain the difference between price elasticity of demand and income elasticity of demand.
Model answer plan
See the answer broken into clear points, with guidance on how each point earns marks.
Animated graph
Watch the graph build step by step in study mode.
What the diagrams must show
- Two diagrams, axes P and Q.
- Diagram 1 (PED): an elastic and an inelastic curve through P1, Q1; the price rising P1 → P2.
- Diagram 2 (YED): D1 shifting right (normal) and left (inferior) at the same price.
How the 10 marks are given
| Marks | What your answer needs |
|---|---|
| 9–10 | Both parts fully explained, terms used correctly all the way through, the diagram included and fully explained |
| 7–8 | Both parts explained, terms mostly right, the diagram included and explained |
| 5–6 | Partly explained, some terms, the diagram included |
| 6 at most | Only one of the two parts answered, however good it is |