Income Elasticity of Demand
— Economics · YED · Paper 2 · 8-mark Part (a) practice —
★ Exam Tip: Part (a) is an 8-marker =
3 Knowledge + 3 Analysis + 2 Evaluation.
In the latest pattern (after 2023) it begins with the command word "Analyze"; older papers said
"Explain". These notes cover the theory once, then 4 past-paper questions worked the way sir does
them.
1. How to Crack the 8-Marker
| Part | Marks | What to write in a YED question |
|---|---|---|
| Knowledge | 3 | define YED + give the formula · define normal / inferior / necessity goods · YED +ve → normal, −ve → inferior, 0 → necessity |
| Analysis | 3 | explain why (income ↑ ⇒ demand ↑ …), the relationship, slope of the curve, and a diagram linked to the text |
| Evaluation | 2 | "it depends…" (type of good, consumer's situation) + a justified conclusion |
Old vs new format: Before 2023 → "Explain", 4
knowledge + 4 analysis, no evaluation. Latest → "Analyze", 3 + 3 + 2.
Old questions are still great practice, but a proper evaluation can't be built on them — any conclusion on an old
question is "forced".
"and" trick: part of the question before "and" = knowledge.
Part after "and" = analysis + evaluation.
Example: "With the help of a formula, explain the meaning of YED [knowledge] and consider the extent to which a rise in income will increase consumption of all goods [analysis + evaluation]."
Habits that save marks
- Spot the elasticity: a question that just says "elasticity" has clue words. income / inferior good / normal good ⇒ YED chapter (others: PED, XED, PES). Sir: "the moment I saw inferior good, the bulb lit up".
- Write full words in the paper: "percentage change in quantity demanded" — no triangle (Δ), no short forms (short form is only for class).
- Never forget the tagline — the last line of a paragraph, e.g. "So whenever YED is positive, it is a normal good." It is the "useful line"; without it you lose the analysis mark.
- If the question asks how goods differ when income changes → draw the diagram and write its explanation.
- "when income changes" ⇒ show a rise and a fall. "a rise in income" ⇒ show only the rise.
2. YED — Definition & Formula
Definition: Income elasticity of demand (YED) measures the responsiveness of quantity demanded to a change in income — the percentage change in quantity demanded due to a percentage change in income.
YED = percentage change in quantity demandedpercentage
change in income
| YED value | Type of good | Income ↑ ⇒ | Relationship | Curve |
|---|---|---|---|---|
| positive (+) | normal | demand ↑ | positive | upward sloping |
| negative (−) | inferior | demand ↓ | negative | downward sloping |
| zero (0) | necessity | no change | none | vertical |
Don't mix up: negative YED = inferior · zero YED
= necessity. (Even sir slipped once in class and corrected himself — get it right in the paper!)
3. Normal Goods (YED > 0)
Definition: Normal goods are those goods which are high quality, branded and expensive. e.g. Apple, Rolex.
- An increase in income will increase demand for normal goods, while a decrease in income will reduce demand for normal goods.
- ⇒ a positive relationship between income and quantity of normal goods ⇒ forms an upward sloping curve (as shown in the diagram).
Tagline: So whenever YED is positive, it is a normal good.
income ↑ ⇒ Q ↑ (A→B) ·
income ↓ ⇒ Q ↓ (A→C)
Diagram explanation (write this):
An increase in income from Y to Y₁ will increase quantity of normal goods from Q to Q₁, causing
movement from point A to point B.A decrease in income from Y to Y₂ will reduce quantity from Q to Q₂ ⇒ movement A to C.
Axes: income (Y) on the vertical axis, quantity of
normal goods on the horizontal axis. Label fully in the paper. Point A = initial income & initial
quantity.
3.1 Normal goods → income elastic or income inelastic
Normal goods can be further classified as income elastic or income inelastic — both still have a positive YED and an upward sloping curve (income & quantity of normal goods are positively related). What changes is how flat the curve is.
| Income ELASTIC | Income INELASTIC | |
|---|---|---|
| Responsiveness | high | low |
| Meaning | a larger change in quantity demanded: income ↑ by a smaller % ⇒ quantity ↑ by a larger % | a smaller change in quantity demanded even when income changes by a larger % |
| YED value | greater than 1 (YED > 1) | positive but less than 1 (0 < YED < 1) |
| Curve | flatter (upward sloping) | steeper (upward sloping) |
Income elastic — income ↑ by
10% (Y→Y₁), quantity of normal goods ↑ by 50% (Q→Q₁), a larger %
Income inelastic — income ↑ by a
lot, quantity ↑ by only a little: movement A→B
Write-up (elastic):
Income elastic has high responsiveness, which means there will
be a larger change in quantity demanded: when income increases by a smaller percentage, quantity of normal
goods will increase by a larger percentage, as shown in the diagram, and it has a YED greater than one.
Write-up (inelastic):
Income inelastic has low responsiveness, which means there
will be a smaller change in quantity demanded when there is a larger change in income, as shown in the
diagram, and it has a YED less than one.
Sir's quick quiz: elastic curve
– flatter or steeper? Flatter, but still upward sloping, because income & normal goods are
positively related.
Extra thought (not from sir): demand for a normal good rises at
exactly the same % as income only when YED = 1; elastic ⇒ rises faster, inelastic ⇒ rises slower. That is
why the answer to "same rate?" is it depends on the value of YED.
4. Inferior Goods (YED < 0)
Definition: Inferior goods are those goods which are low quality, not branded and cheap.
- An increase in income will reduce demand for inferior goods — why? people now spend on normal goods instead.
- A decrease in income will increase demand for inferior goods — people can't afford normal goods any more, so they shift towards inferior goods.
- ⇒ a negative relationship between income and quantity of inferior goods ⇒ forms a downward sloping curve.
Tagline: So whenever YED is negative, it is an inferior good.
income ↑ ⇒ Q ↓ (A→B) ·
income ↓ ⇒ Q ↑ (A→C)
Diagram explanation (write this):
An increase in income from Y to Y₁ will reduce quantity of inferior goods from Q to Q₁,
causing movement from A to B.A decrease in income from Y to Y₂ will increase quantity of inferior goods from Q to Q₂, causing movement from A to C.
Remember: income ↓ ⇒ you
can not afford normal goods ⇒ you shift to inferior goods.
5. Necessity Goods (YED = 0)
Definition: Necessity goods (also called necessary goods) are those goods which have no responsiveness, which means there will be no change in quantity demanded.
- An increase or decrease in income will have no effect on the quantity of necessity goods — quantity stays fixed whatever the income.
- ⇒ no relationship between income and quantity of necessity goods ⇒ thus a vertical curve.
Tagline: So whenever YED is zero, it is a necessity good.
income ↑ or ↓, quantity
stays at Q
Diagram explanation (write this):
An increase in income (Y to Y₁) or a decrease in income (Y to Y₂) has no effect on quantity of
necessity goods — it stays at Q (no responsiveness), so the movement is only up or down the
vertical line.
Sir's aside: a necessity
is the same for everybody — rich or poor.
6. Past-Paper Practice — 4 × 8 Marks
Fig names below: Normal = §3 diagram · Elastic/Inelastic = §3.1 diagrams · Inferior = §4 diagram · Necessity = §5 diagram. Every answer follows the same order: definition + formula → define the good(s) → relationship → diagram + explanation → evaluation.
May/June 2024 · p2 · v1 · q3(a)8 marks · 3K + 3A + 2E · normal
goods, elastic/inelastic
Q: With the help of a formula, explain what is meant by income elasticity of demand for a product, and consider the extent to which demand for the product will always rise at the same rate as the income of its consumer.
Sir's thinking: demand rises when income rises if it's a normal good. Same rate or different rate? — the value of YED tells you: income elastic or income inelastic.
Marking plan:
- Knowledge — define YED + formula · define normal goods · YED positive ⇒ normal good · define income elastic & inelastic · two diagrams, linked to the text.
- Analysis — income ↑ ⇒ demand ↑ if normal good; what happens if inferior? if necessity? ⇒ "it depends on the coefficient" (coefficient = the value of YED).
- Evaluation — it depends on the elasticity: whether income is elastic or inelastic.
Answer — paragraph by paragraph (condensed):
- YED definition + formula (§2).
- Normal goods — high quality, branded, expensive (Apple, Rolex); income ↑ ⇒ demand ↑, income ↓ ⇒ demand ↓ ⇒ positive relationship ⇒ upward sloping; "whenever YED is positive, it is a normal good."
- Normal goods can be further classified between income elastic and inelastic.
- Elastic: high responsiveness ⇒ larger change in quantity demanded; income ↑ by a smaller % ⇒ quantity ↑ by a larger % (Diagram 1); YED > 1.
- Inelastic: low responsiveness ⇒ smaller change in quantity for a larger change in income (Diagram 2); YED < 1.
- Analysis paragraph: an increase in income will increase demand — or not? It depends upon the coefficient / value of YED. Inferior good ⇒ demand will decrease if income increases (it carries a negative coefficient). Necessity good ⇒ an increase in income has no effect on quantity (carries no coefficient). Moreover, a normal good with a positive coefficient ⇒ an increase in income will increase its demand.
- Evaluation: To conclude, demand will not always increase with an increase in income, as it depends on the type of good and the economic situation of the consumer.
Note: "Diagram 1" and "Diagram 2" in this answer = the
elastic and inelastic diagrams of §3.1 (numbering is different in the next question).
older paper (pre-2023; sir thinks ≈ 2016)8 marks · practice ·
"values: +ve, −ve, zero"
Q: Explain using income elasticity of demand the values which are positive, negative and zero.
Old format (4K + 4A, "Explain") — good for practice. Sir answers in the new style (3 + 3 + 2) and adds a forced conclusion.
- Knowledge — YED definition + formula · define normal, inferior, necessity goods · YED +ve ⇒ normal, −ve ⇒ inferior, 0 ⇒ necessity.
- Analysis — how do we know positive = normal, negative = inferior, zero = necessity? explain it, and draw the 3 diagrams and link them (positive ⇒ upward, negative ⇒ downward, zero ⇒ vertical).
Answer — three paragraphs, each = definition → effect of income ↑/↓ → relationship → curve →
tagline → diagram:
- Positive YED: normal goods (§3) — positive relationship — upward curve — "whenever YED is positive, it is a normal good" — diagram 1: A→B (income ↑), A→C (income ↓).
- Negative YED: inferior goods (§4) — negative relationship — downward curve — "whenever YED is negative, it is an inferior good" — diagram 2: Y→Y₁ gives Q→Q₁ (↓); Y→Y₂ gives Q→Q₂ (↑).
- Zero YED: necessity goods (§5) — no responsiveness, no relationship — vertical curve — "whenever YED is zero, it is a necessity good" — diagram 3.
- Forced conclusion (a proper one can't be built on an old question): To conclude, elasticity varies from individual to individual — for one it might be an inferior good, for another a necessity good, for another a normal good.
May/June 2019 · p2 · v2 · q2(a)8 marks · practice · inferior vs
necessity
Q: Explain how economists use the concept of elasticity to distinguish between inferior good and necessity good when income changes.
- Which elasticity? Many exist (PED, YED, XED, PES). The words inferior good and income ⇒ it's the YED chapter. "Necessity goods" = "necessary goods".
- "when consumer income changes" — it doesn't say rises/falls ⇒ show both.
- Marks still 3K + 3A + 2E.
Marking plan: K — define YED + formula; define inferior goods, YED negative ⇒ inferior. A — diagram + explanation; then necessity goods, YED zero ⇒ necessity, its diagram + explanation. E — (not really there, but can be made).
Why the diagram explanation is compulsory:
The question says show how you differentiate between the two goods when income changes. So say, in the
diagram, what income ↑/↓ does to the quantity of inferior goods — otherwise the examiner can't see the
difference. The inferior-goods paragraph and diagram are an exact copy of §4, then one more paragraph
explains the diagram:
- An increase in income from Y to Y₁ will reduce quantity of inferior goods from Q to Q₁, causing movement from A to B.
- A decrease in income from Y to Y₂ will increase quantity of inferior goods from Q to Q₂, causing movement from A to C.
Evaluation (can be made): If it were a normal good, income changes would also affect it (income ↑ ⇒ demand ↑).
Feb/March 2024 · p2 · v2 · q3(a)8 marks · 3K + 3A + 2E · "all goods
& services"
Q: With the help of a formula, explain the meaning of income elasticity of demand and consider the extent to which a rise in income will increase the consumption of all goods and services.
"and" trick ⇒ before "and" = knowledge (define YED + formula). After "and" = analysis + evaluation. Will a rise in income raise consumption of all goods? No — only normal goods.
Marking plan:
- YED definition + formula (write full words — "percentage" and "change", no triangle).
- Define normal goods (+ example Apple & Rolex): income ↑ ⇒ demand ↑, income ↓ ⇒ demand ↓ ⇒ positive relationship ⇒ upward sloping demand curve; tagline: whenever YED is positive, it is a normal good.
- One line on inferior goods: "low quality, not branded and cheap; there is a negative relationship between income and quantity of inferior goods."
- Diagram + explanation — only a rise in income.
- Evaluation — inferior ⇒ consumption falls; necessity ⇒ no effect; + justified conclusion.
only a RISE in income: A→B
Careful! "Two students: one is foolish — he shows income
falling too." The question says only a rise in income, so show only the rise.
Explanation:
An increase in income from Y to Y₁ will increase quantity of normal goods
from Q to Q₁, thus causing movement from point A to point B, as shown in the diagram below.
Evaluation — sir's written version:
- To conclude, an increase in income will reduce consumption of inferior goods, as consumers will be spending on luxury, i.e. normal goods ⇒ so income ↑ does not always raise quantity.
- Moreover, if it is a necessity good, an increase in income will have no effect on consumption of necessity goods.
- Lastly (justified conclusion): income is not in the control of the consumer, as it varies with the economic condition of the country and tax rates.
marking scheme (sir read it out):
- AO1 knowledge & understanding (max 3): accurate definition of YED + accurate formula = 2 marks; understanding of the difference between normal and inferior good = 1 mark.
- AO2 analysis (max 3): normal goods have a positive YED; use a diagram (upward sloping curve) or the formula to show why an increase in income increases consumption of such goods; justify with an appropriate example.
- Evaluation (max 2): 1 mark for a valid explanation that if the good is inferior, demand for it will fall when income rises, as consumers adjust their spending and consume more normal and luxury goods; 2nd mark for a justified conclusion (income is not in the consumer's control — economic condition & tax rates).
7. Quick Recap — Full Chapter Cheat-Sheet
YED = % change in quantity demanded% change in
income
| YED | Good | What it is | Income ↑ ⇒ | Curve |
|---|---|---|---|---|
| +ve | Normal | high quality, branded, expensive (Apple, Rolex) | Q ↑ | upward |
| −ve | Inferior | low quality, not branded, cheap | Q ↓ | downward |
| 0 | Necessity | no responsiveness | no change | vertical |
✓ Quick Recap — YED
- Elastic normal good: YED > 1, flatter curve, % change in Q bigger than % change in income (e.g. income +10% ⇒ Q +50%).
- Inelastic normal good: YED < 1 (but positive), steeper curve, % change in Q smaller.
- 8-marker = 3 K + 3 A + 2 E. Before "and" ⇒ knowledge; after "and" ⇒ analysis + evaluation.
- Always: full-word formula · define the good · relationship · tagline · diagram and its explanation (A→B, A→C) · evaluation.
- "Rise in income" ⇒ diagram shows only the rise · "income changes" ⇒ show rise and fall.
Evaluation lines to reuse:
- To conclude, demand will not always increase with an increase in income, as it depends on the type of good and the economic situation of the consumer.
- An increase in income will reduce consumption of inferior goods, as consumers will be spending on luxury (normal) goods.
- Moreover, if it is a necessity good, an increase in income will have no effect on consumption.
- Lastly, income is not in the control of the consumer, as it varies with the economic condition of the country and tax rates.
- Elasticity varies from individual to individual — for one it might be inferior, for another necessity, for another normal.