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Income elasticity of demand; its determinants and applications

- Outline the concept of income elasticity of demand, understanding that it involves responsiveness of demand (and hence a shifting demand curve) to a change in income.

- Calculate YED using the following equation
**YED=%ΔQd/%ΔY** - Show that normal goods have a positive value of YED and inferior goods have a negative value of YED.
- Distinguish, with reference to YED, between necessity (income inelastic) goods and luxury (income elastic) goods.
- Examine the implications for producers and for the economy of a relatively low YED for primary products, a relatively higher YED for manufactured products and an even higher YED for services.

- Outline the concept of cross price elasticity of demand, understanding that it involves responsiveness of demand for one good (and hence a shifting demand curve) to a change in the price of another good.

- Calculate XED using the following equation
**XED=%ΔQd of Good X/%ΔP of Good Y** - Show that substitute goods have a positive value of XED and complementary goods have a negative value of XED.
- Explain that the (absolute) value of XED depends on the closeness of the relationship between two goods.
- Examine the implications of XED for businesses if prices of substitutes or complements change.

Obviously, you all did your homework (except for __________?) and have already watched the above video on XED... hand in your graphs now. We will watch the YED graph together and then discuss both concepts and do some tasks, including these questions...

- Examine the implications of XED for businesses if prices of substitutes or complements change.
- Use examples to explain how knowledge of cross-price elasticities of demand can help firms make decisions in the case of (a) substitutes; (b) complements

- Examine the implications for producers and for the economy of a relatively low YED for primary products, a relatively higher YED for manufactured products and an even higher YED for services.
- What is one likely explanation of the rapid growth of service sector industries such as health care and gym membership, compared with other industries in the primary and secondary sectors?

This article

__Meet the credit crunch winners__illustrates a good example of real life YED. And

__Will price discounting help restaurants survive the crunch?__has example of all three concepts of demand elasticities.

And for some light relief...