An Analysis of Income Elasticity of Demand: Types and Examples

This assignment provides an in-depth exploration of income elasticity of demand (YED), a key concept in economics that measures the responsiveness of quantity demanded to changes in consumer income. It defines YED, explains its calculation, and categorizes goods based on their elasticity. The assignment distinguishes between positive, unitary, negative, and zero income elasticity, associating them with normal, luxury, and inferior goods, providing clear examples such as milk, clothing, and salt to illustrate each type. It includes an analysis of necessity goods and income inelasticity of demand. Furthermore, the assignment includes comments on classmate posts, reinforcing the understanding of these concepts through real-world scenarios and feedback. References to credible sources are also provided to support the analysis.

Running Head: INCOME ELASTICITY 1
Income Elasticity of Demand
Name
Institution

INCOME ELASTICITY 2
Income Elasticity of Demand
Income elasticity of demand (YED) refers to the sensitivity of the quantity demanded for
a particular commodity to a change in the income of individuals demanding the product.
Therefore, it shows the relationship that exists between the demanded quantity and the income of
the buyer. In economics, it is obtained as a ration of the percentage change in the quantity
demanded to the percentage change in the income of the consumer.
Types of Income Elasticity of Demand
It is worth noting that different types of goods have different forms of income elasticity
of demand. Specifically, a commodity can either have positive income elasticity, unitary income
elasticity, negative income elasticity or a zero income elasticity of demand.
Positive Income elasticity of Demand
Noteworthy, a positive YED occurs when a rise in the income of the consumer brings
about an increase in the demand of the product. Normally, this type of elasticity is associated
with normal goods and services (Economics Online, n.d.). Additionally, it is worth pointing out
that necessity and luxury goods also have a positive income elasticity of demand.
Necessity Goods
A necessity service or good has an income elasticity of demand of less than one. A
perfect example of a necessity product is milk. A unit increase in the income of the consumer
results in a less than proportionate increase in the quantity of milk demanded.

INCOME ELASTICITY 3
Illustration:
Suppose the income of a consumer increases by 10 percent from $10000 per month to $11000
per month. Here income rises by 10 percent. Also suppose that the increase in income results in a
rise in the demand of milk from 25 units to 26 units. This implies that quantity demanded rises
by 4 percent. Therefore, the YED of milk will be estimated as +0.4 percent. In this case, the
demand of milk rises but less than proportionately to the income, indicating that milk is a normal
necessity good.
Unitary Income Elasticity of Demand
A unitary YED arises when a rise in income of the consumer causes a proportionate rise
in the demand of the product. Specifically, a unit increase in income results in a unit increase in
the demand of the good (Intelligent Economist, n.d.). Notably, there are a few products that
possess this kind of income elasticity of demand. A perfect example of a good with unitary YED
is clothing.
Illustration:
Suppose the income of the Washington’s household increases from $30000 per year to $30600
per year. In turn, this implies that there is a 2 percent increase in the level of household income.
Also suppose that the increase income results in an increase in the quantity demanded of a dress
from 5 units to 6 units. Also, this implies that the quantity demanded increases by 2 percent.
Therefore, a unit increase in the income level brings about a proportionate increase in the
demand of a dress. In this case, the YED is unitary or equal to 1.

INCOME ELASTICITY 4
Income Inelasticity of Demand
Income inelastic demand arises when a positive increase in the income of a buyer results
in no apparent variation in the quantity demanded of that product (Pettinger, n.d.). A perfect
example of this type of product is salt. Salt is demanded in the same quantity by a high income
and a low income household (Nitisha, n.d.).
Illustration: Suppose an increase in the income of the Berry Household from $3500 to $4000.
This implies that the income of the consumer increases by 0.142 percent. However, the demand
for salt remains constant at 2 units. In this case, the YED is zero because a positive change in the
income of a household results in no change in the demand for salt. Thus salt has a zero income
elasticity of demand or an income inelastic demand.
Comment on Posts by Classmates
Post 1
The first post is relatable and true. This is based on the fact that motor vehicles are luxury goods
which have a positive income elasticity of demand. As such, an increase in the income of a
consumer results in an increase in the demand of such products. Hence, as the income of the
consumer rises, more and more units of the product are demanded. Therefore, it is true for the
student use an example of cars as a product with a positive income elasticity of demand.
Post 2
The second post is also true and relatable. Particularly, an inferior good is one whose demand
declines when the income of a consumer increases and they opt for a better alternative in the

INCOME ELASTICITY 5
market. The student uses the example of a daily meal as the inferior good. In this case, an
increase in the income of the consumer results them to change their consumption from a normal
meal to a soup delicacy. In turn, this results in a negative change in the demand for a product,
implying that normal meals are inferior goods when compared to soup delicacies.
Response to Feedback received on My Examples
I also had the chance of showing my fellow students my work and they offered their opinion
regarding my example. Below is my response to their feedback:
Response 1
The first student reviewed my example on positive income elasticity. In his opinion, the
example is correct and relatable. As such, he classifies milk as a normal good whose
consumption rises with an increase in the income level of the consumer. Thus, it was correct for
me to use the example of milk to explain the concept of positive income elasticity.
Response 2
The second peer reviewed my example on the concept of income inelastic demand. To this, she
said that the example is very practical, relatable and true. Every household purchases salt,
whether poor or rich. And a rise in the income level of the household does not cause an increase
in the quantity of salt demanded by the consumers. Owing to this response, it is rightful for me
say that my examples are extremely practical and relatable as my fellow students agree with me
on the same.

INCOME ELASTICITY 6
References
Income elasticity of demand. (n.d.) Intelligent Economist. Retrieved March 21, 2018, from
https://www.intelligenteconomist.com/income-elasticity-of-demand-yed/
Income elasticity of demand. (n.d.). Economics Discussion. Retrieved March 21, 2018, from
http://www.economicsdiscussion.net/elasticity-of-demand/income-elasticity-of-demand-
measurement-types-and-significance/3523
Income elasticity of demand. (n.d.). Economics Online. Retrieved March 21, 2018, from
http://www.economicsonline.co.uk/Competitive_markets/Income_elasticity_of_demand.
html
Income elasticity of demand. (n.d.). XplainD. Retrieved March 21, 2018, from
https://xplaind.com/614558/income-elasticity-of-demand
Pettinger, T (n.d.) Income elasticity of demand (YED). (n.d.). Economics Help. Retrieved March
21, 2018, from https://www.economicshelp.org/microessays/equilibrium/income-
elasticity-demand/