Income elasticity of demand

The formula

YED = percentage change in quantity demanded / percentage change in income

Rearranged: % change in quantity demanded = YED x % change in income.

The October 2024 WBS11 paper asked for exactly this: YED of 1.8 and incomes up 5%, so demand rises by 1.8 x 5 = 9%. The scheme gave 4 marks for '9%' but only 3 for '9' without the % sign.

Normal and inferior goods

• Normal goods: demand rises when income rises; YED is positive.

- YED between 0 and 1: income inelastic necessities (bread, electricity): demand rises, but by a smaller % than income.

- YED greater than 1: income elastic luxuries (foreign holidays, restaurant meals, designer clothes): demand rises by a larger % than income.

• Inferior goods: demand falls when income rises (consumers switch to better alternatives); YED is negative (supermarket value ranges, bus travel in some countries, second-hand goods).

Factors and significance

Factors influencing YED: whether the product is a necessity or a luxury; the proportion of income spent on it; the income level of the country or consumer (a car may be a luxury in a low-income country and a necessity in a high-income one); and the availability of better quality alternatives (which makes cheaper products inferior).

Significance to businesses:

• Forecasting sales: firms predict demand when incomes are expected to change (economic growth or recession), and plan output, stock and staffing.
• Product portfolio: a mix of luxuries and inferior goods spreads risk across the economic cycle. Supermarkets push value ranges in recessions and premium ranges in booms.
• Marketing and targeting: firms selling income elastic products may target growing high-income markets abroad.

Limitations: YED is estimated from past data and assumes other factors are unchanged.

Worked example

Average incomes rise from $24,000 to $25,200. Sales of a restaurant chain rise from 50,000 to 56,000 meals a month. Calculate YED and classify the product.

1. % change in income = (25,200 - 24,000) / 24,000 x 100 = 5%.
2. % change in quantity = (56,000 - 50,000) / 50,000 x 100 = 12%.
3. YED = 12 / 5 = 2.4.

Answer: YED = 2.4: positive and above 1, so restaurant meals are a normal, income elastic (luxury) good.

Check yourself

1. A parcel delivery service has a YED of 1.8. Incomes are forecast to rise by 5%. Calculate the percentage change in demand.
   Show answer

   9.0 %. 1.8 x 5 = 9%.

2. Incomes rise by 4% and demand for a budget clothing range falls by 6%. Calculate the YED.
   Show answer

   -1.5. -6 / 4 = -1.5.

3. Incomes fall by 3% in a recession. A luxury watch brand has a YED of 2.4 and sells 12,000 watches a year. How many will it sell after the fall in incomes?
   Show answer

   11136 watches. %Qd = 2.4 x -3 = -7.2%; 12,000 x 0.928 = 11,136.

4. A product has a YED of -0.7. It is
   • a normal, income elastic good
   • an inferior good
   • a normal, income inelastic good
   • price inelastic
   Show answer

   an inferior good. Negative YED means demand falls as incomes rise.

5. Which YED value suggests a luxury good?
   • 0.3
   • -1.2
   • 0
   • 2.1
   Show answer

   2.1. Income elastic: above 1.

6. Explain one way knowledge of YED can help a supermarket plan for a recession.
   Show answer

   If incomes fall, demand for inferior goods such as value own-label ranges will rise, so the supermarket can stock and promote more of them and fewer premium lines.. Shift the product mix towards inferior goods and away from luxuries.

7. Why might a car be income elastic in a low-income country but income inelastic in a high-income country?
   • Cars are always inferior goods
   • Prices of cars are fixed by law
   • YED does not depend on income levels
   • It is a luxury where incomes are low and a necessity where incomes are high
   Show answer

   It is a luxury where incomes are low and a necessity where incomes are high. The income level of consumers affects whether a product is seen as a luxury.

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Sources

• Pearson Edexcel International Advanced Subsidiary/Advanced Level in Business specification (2018)
• Pearson WBS11/01 mark scheme, October 2024 series (published January 2025)

Last updated 8 November 2026. Spotted a mistake? Tell us.