Knowledge Organiser / Infographic
What is the formula of Income Elasticity of Demand (YED)?
YED = % Change in Demand / % Change in Income
% Change in Demand = YED x % Change in Income
% Change in Income = YED x % Change in Demand
What is the definition?
Income Elasticity of Demand (YED) shows the change in demand to the change in income e.g., 0.4 YED means demand increases by 0.4% (0.004) for every 1% increase in income.
Advantages of Using Income Elasticity of Demand (YED)
Indicate Adjustment Required for the Product Portfolio
- During economic growth, develop and promote luxury goods rather than inferior goods
- Potential to drive sales revenue, depending on the perception of the brand
- Improve cash flow for inferior good brands that adapt to economic growth
Pricing Decisions
- Increase luxury pricing during high demand/decrease during low demand
- Increase gross profit margins / minimise cashflow damage
- Reinvest in advertising / develop greater cash reserves
Disadvantages of Using Income Elasticity of Demand (YED)
Lots of other factors affecting demand, not just incomes
- Marketing managers may ignore these factors, such as consumer taste changes, new competitors, or the reputation of the product
- Inaccurate sales forecasts, potentially creating poor sales targets
- Poor decision-making with regard to overstocking inventory, underinvestment in marketing (research, development, promotion)
Income Changes Don’t Guarantee an Increase in Demand for an Elastic Good
- Consumers may save, invest, or buy a more desirable good for competition
- Misallocation of resources
- Negatively impact profit margins
Is it a good idea to consider income elasticity of demand?
Ultimately, it depends on…
- …whether the business sells inferior or luxury goods, as the model is not as useful for businesses selling necessities.
- …the quality of the data at hand in terms of incomes, and acknowledgement of other factors such as consumer tastes and competition.
- …the size of the business as smaller business owners will unlikely have the skills to calculate or the resources to adapt accordingly.
Past Paper Questions on Income Elasticity of Demand (YED)
Edexcel A-Level Business
A-Level Paper 1 – June 2022 – Question 1a
Using the data in Extract A, explain one way demand for online food deliveries is affected by income elasticity of demand. [4 marks.
A-Level Paper 3 – June 2019 – Question 1a
Using the data in Extract A, assess two reasons why income elasticity of demand for holidays may be income elastic. [8 marks]
A-Level Paper 1 – June 2018 – Question 1a
Using the data in Extract A, calculate, to 2 decimal places, the income elasticity of demand for takeaway meals. You are advised to show your working. [4 marks]
AQA A-Level Business
A-Level Paper 1 – June 2017 – Question 20
A café sells two types of hot drinks. These drinks have the following income elasticities of demand:
Coffee: +2.0
Tea: -0.5
The volume of coffee sales is several times greater than the volume of tea sales. Based on the information above, analyse how the café’s overall sales volume of hot drinks would be affected by a rise in consumers’ incomes. Assume there are no other changes. [9 marks]
A-Level Paper 2 – June 2018 – 3.1
Data: Income elasticity of demand for GA flights: +1.5
GA is considering cutting the price of its tickets. Explain how this might increase its operating profit margin on each ticket sold. [5 marks]
Paper 1 from 2020 and 2021 featured MCQs on YED.
