Price is not the only thing that shifts demand. When a country gets richer, some markets take off and others quietly shrink — and it is the same shoppers doing both. Income elasticity of demand puts a number on that, and unlike PED, the minus sign here matters enormously.
📚 What you need to know
YED measures how responsive quantity demanded is to a change in income.
YED = % change in quantity demanded ÷ % change in income.
Positive YED = normal good. More income, more demand.
Negative YED = inferior good. More income, less demand, because people trade up to something better.
Normal goods split in two: necessities (YED between 0 and 1) and luxuries (YED above 1).
Never drop the minus sign. With PED you ignore it; with YED it is the whole answer.
Engel curves plot income against quantity demanded and show all of this in one picture.
The formula
Income elasticity of demand
YED = % change in quantity demanded ÷ % change in income
The method is identical to PED. Work out the two percentage changes, write them down, then divide. The only difference is what you do at the end: with YED you keep the sign and use it to name the type of good.
If you remember one thing from this page, make it this. PED: drop the sign. YED: keep the sign. Students who mix that up throw away marks they had already earned.
Reading the number
Every YED value sits somewhere on one line. Where it sits tells you what kind of good you are looking at.
Necessities and luxuries are both normal goods. The dividing line between them is a YED of exactly 1.
YED value
Type of good
What happens when income rises
Example
Below 0
Inferior
Demand falls as people switch to better alternatives
Own-brand basics, bus travel, instant noodles
Between 0 and 1
Normal — necessity
Demand rises, but by proportionally less than income
Bread, milk, electricity, basic clothing
Above 1
Normal — luxury
Demand rises by proportionally more than income
Air travel, restaurant meals, designer goods
“Inferior” is not an insult about quality. It is only a statement about how demand reacts to income. A good can be perfectly decent and still be inferior in the economic sense, because richer buyers trade up.
Engel curves
An Engel curve plots income on the vertical axis and quantity demanded on the horizontal axis. It shows the same information as the YED number, but as a picture, and once you have seen the three shapes together you will not forget them.
Watch the axes. Engel curves put income on the vertical axis, which is the opposite of what you are used to on a demand diagram.
Almost everyone draws their first Engel curve with the axes swapped. Write “income” on the vertical axis before you draw anything else and the mistake disappears.
What moves incomes, and why firms care
Anything that changes people’s real incomes changes demand across the whole economy at once. Economic growth and rising wages, a recession, minimum wage laws, income tax changes and more open trade all do it.
The pattern is predictable and it is the pattern examiners want you to describe:
In a boom, demand for luxuries grows fastest, while demand for inferior goods actually falls.
In a recession, that reverses. Discount supermarkets and bus operators get busier while airlines and restaurants suffer.
For a firm this is a planning tool. If your product has a high YED, your sales will swing hard with the economic cycle — great in good years, dangerous in bad ones. That argues for holding cash, or for adding a lower-YED product line to steady the business. A firm selling only necessities has the opposite problem: safe, but it will not grow much when the country does.
Zoom out and YED explains structural change. As countries get richer, spending shifts out of agriculture (low YED) and into manufactured goods and then services such as healthcare, travel and education (high YED). That is why the sector shares of an economy change as it develops.
Worked examples
WORKED EXAMPLE 1
A household’s monthly income rises from £1,800 to £2,070. Restaurant meals bought each month rise from 4 to 5. Calculate the YED and identify the type of good. [4]
Step 1: percentage change in quantity demanded(5 − 4) ÷ 4 × 100 = +25%Step 2: percentage change in income(2070 − 1800) ÷ 1800 × 100 = +15%Step 3: divideYED = 25 ÷ 15 = +1.67YED = +1.67, so restaurant meals are a normal good and a luxuryPositive means normal. Above 1 means luxury. Say both.
WORKED EXAMPLE 2
During a recession average incomes fall by 8%. Sales of a supermarket’s own-brand pasta rise by 4%. Calculate the YED and comment on the result. [3]
Step 1: put both changes in with their signs% change in QD = +4%, % change in income = −8%Step 2: divideYED = +4 ÷ −8 = −0.5Step 3: interpret
Negative, so own-brand pasta is an inferior good. As incomes fell, shoppers traded down to it from branded pasta.
YED = −0.5, an inferior goodDo not remove the minus sign. Here it is the entire answer.
WORKED EXAMPLE 3
A bakery sells 60,000 loaves a year and estimates YED at 0.4. Incomes are forecast to rise 5%. Estimate next year’s sales. [2]
Step 1: find the percentage change in quantity0.4 × 5 = +2%Step 2: apply it60,000 × 1.02 = 61,200About 61,200 loavesA YED of 0.4 confirms bread is a necessity — incomes rose 5% but sales grew only 2%.
💡 Exam tip
State the sign and then the size. “Positive, so normal; above 1, so a luxury” is a complete answer.
Use the phrase “proportionally more/less than the change in income” when explaining necessity versus luxury.
If a question mentions a recession or a boom, it is asking about YED even if it never uses the term.
For firms, link YED to a decision: what should they stock, invest in, or hedge against?
Draw Engel curves with income on the vertical axis. Label both axes every time.
Add a limitation for evaluation: YED estimates come from past data and may not hold as tastes change.
⚠️ Common mix-up
Dropping the minus sign like you do for PED. With YED the sign carries the meaning.
Thinking inferior means poor quality. It only describes the reaction to income.
Forgetting that necessities are normal goods too. They are normal, just not very responsive.
Swapping the axes on an Engel curve. Income is vertical, quantity is horizontal.
Confusing YED with PED. YED is about income; PED is about price. Check which one moved in the question.
Assuming a good has one fixed YED forever. A good can shift from luxury to necessity as a country develops.
Up next: Price Elasticity of Supply — we have measured how buyers react to price and to income. Now we swap sides of the market and ask how quickly producers can respond.
Want this explained one-to-one?
Book a free session with an experienced IB Economics tutor and get your trickiest topics made simple.
