2.5 (Micro) Income elasticity of demand: YED: Engel Curve: Rising income: Inferior, Normal, Luxury

Video tutorial for IB Economics students illustrating how to draw and analyze YED in regards to rising income and the impact on demand (household expenditure) for inferior and normal goods (necessities and luxuries) utilizing the Engel curve

1. YED less than 0 is an inferior good or service
2. YED being greater than 0 but less than 1 is a normal good that is a necessity
3. YED being greater than 1 is a normal good that is a luxury

Engel curves illustrate the relationship between household expenditure on a good or service and household income.
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Calculating YED: Engel curve practice videos:
1. "2.5 (Micro) Calculation 1: Income elasticity demand: YED: Engel Curve: Rising income: Inferior good":    • 2.5 (Micro) Calculation 1: Income ela...  

2. "2.5(Micro) Calculation 2: Income elasticity: YED: Engel Curve: Rising income: Normal good, Necessity":    • 2.5(Micro) Calculation 2: Income elas...  

3. "2.5 (Micro) Calculation 3: Income elasticity: YED: Engel Curve: Rising income: Normal good, Luxury":    • 2.5 (Micro) Calculation 3: Income ela...  

Playlist: PED, YED, PES:    • Micro: Elasticity: PED, YED, PES: 2.1...  
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Scenario 1: Rising income and the impact on demand (household expenditure) for inferior and normal goods (necessities and luxuries)

Note:
IB Econ Paper analysis of the economic model (at time 1:00)
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Analysis: Three markets to satisfy the need to eat (Graphs A, B, C)

Graph A: Market demand (household expenditure) on Cooking at Home with Low Quality Inputs (use of generic brand inputs to cook) (at time 1:34)
X-axis measures quantity demanded
Y-axis measures income (Y)

There is an downward sloping Engel curve (1)

Assumptions that per capita incomes (Y) are rising over time

*YED = %∆Qd divided by the %∆Y
Y=income

As per capita incomes rise (Y1 to Y2), quantity of demand for inferior goods decreases from Q1 to Q2
YED is less than 0
As income rises (+), quantity demanded decreases (-)
YED = negative (-) value / positive (+) value = negative (-) value
Negative relationship between income and quantity of demand signals an inferior good

YED = -0.5, meaning that for every 1% increase in income, there is a 0.5% decrease in the Qd for the inferior good
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Graph B: Market demand (household expenditure) for Cooking at Home with High Quality Inputs (use of brand name inputs to cook) (at time 3:50)
X-axis measures quantity demanded
Y-axis measures income (Y)

There is an upward sloping Engel curve (2)

Assumptions that per capita incomes (Y) are rising over time

As per capita incomes rise (Y3 to Y4), quantity of demand for normal goods that are necessities increases (Q3 to Q4)
YED greater than 0
As income rises (+), quantity demanded increases (+)
YED = positive (+) value / positive (+) value = positive (+) value
Positive relationship between income and quantity of demand signals a normal good

Thus as per capita incomes rise (Y3 to Y4), quantity of demand for normal goods that are necessities increases from Q3 to Q4
YED is greater than 0, but less than 1
Can also observe that the %ΔY is greater than the %ΔQd
For example, YED = 0.7%, thus for every 1% increase in income, quantity of demand increases by 0.7%
YED for necessities have a limited range to increase (YED between 0 and 1) since consumers will utilize additional income only to satisfy needs so that remaining income can be used to enjoy luxury goods and services

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Graph C: Market demand (household expenditure) for Dining at Restaurants (at time 6:45)
X-axis measures quantity demanded
Y-axis measures income (Y)

There is an upward sloping Engel curve (3)

Assumptions that per capita incomes (Y) are rising over time

As per capita incomes rise (Y5 to Y6), quantity of demand for normal goods that are luxuries increases (Q5 to Q6)
YED greater than 0 (normal good), and greater than 1 (luxury good)
As income rises (+), quantity demanded increases (+)
YED = positive (+) value / positive (+) value = positive (+) value
Positive relationship between income and quantity of demand signals a normal good

Thus as per capita incomes rise (Y5 to Y6), quantity of demand for normal goods that are luxuries (dining at restaurants) increases from Q5 to Q6
YED is greater than 1
Can also observe that the %ΔY is less than the %ΔQd

For example, YED = 2.5%, thus for every 1% increase in income, quantity of demand increases by 2.5%