Moving on to look at YED, we will see how demand varies with income and the types of relationships that a YED value can identify.

Formally defined, YED, or income elasticity of demand, is the responsiveness of demand to a change in real income. It is calculated by the % change in demand over the % change in real income and can be both positive and negative (unlike PED which is usually negative).

When it has been calculated, the result can be interpreted. If the value is negative, i.e. YED<0, then it is an inferior good. This means that when incomes go up, people demand less of it. The inverse is also true – when incomes go down, demand goes up. This tells us that inferior goods are goods often bought when you are struggling financially or looking to save money, such as own-brand chocolate, canned soup and public transport.

If the value is positive, i.e. YED>0, then it is a normal good. When people have more money, they buy more of it – this can be any good from cars to games. In addition, when YED>1, it can also be classified as a luxury good – demand increases by a greater proportion than the income rise. This also means that demand decreases by a larger proportion, and applies to luxuries like watches and branded clothing.

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