When people get richer they do not just buy more of everything. They buy more restaurant meals and fewer instant noodles. Income elasticity of demand puts a number on that, and unlike PED, the sign of the number is the most useful part.
📘 What you need to know
YED measures how responsive quantity demanded is to a change in income, not price.
YED = % change in quantity demanded ÷ % change in income.
Positive YED = normal good. Income up, demand up.
Negative YED = inferior good. Income up, demand down, 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 here. With PED you can ignore it; with YED it tells you what kind of good you are dealing with.
Engel curves plot income against quantity demanded and show the same three cases as a picture.
The formula
Identical shape to PED, but income replaces price on the bottom.
Income elasticity of demand
YED = % change in quantity demanded ÷ % change in income
Same two-step routine as PED: work out both percentage changes first, then divide. Quantity always goes on top.
WORKED EXAMPLE
A household’s weekly income rises from $400 to $500. Restaurant meals bought per month rise from 8 to 12. Calculate the YED and say what kind of good this is. [3]
Step 1: % change in quantity demanded(12 − 8) ÷ 8 × 100 = +50%Step 2: % change in income(500 − 400) ÷ 400 × 100 = +25%Step 3: divideYED = 50 ÷ 25 = +2YED = +2: a normal good, and a luxuryPositive, so normal. Bigger than 1, so income elastic — a luxury.
Reading the number
Two dividing lines matter: zero and one. Zero tells you whether the good is normal or inferior. One tells you whether a normal good is a necessity or a luxury.
The same good can move along this line over time. As a country gets richer, goods that were once luxuries slide back towards being necessities.
Normal goods: necessities and luxuries
A necessity has a YED between 0 and 1. You buy more of it as your income rises, but not much more — nobody eats four times as much bread because they got a pay rise. A luxury has a YED above 1: demand rises proportionally faster than income. Holidays, restaurant meals and new cars behave this way.
Inferior goods
An inferior good has a negative YED. As income rises people buy less of it, because they can now afford the thing they actually wanted. Own-brand food, long-distance coach travel and second-hand clothes are the classic examples. Nothing is inferior by nature — it depends on who the buyer is and how rich they are.
Engel curves
An Engel curve shows the relationship between income and quantity demanded for one good. Put income on the vertical axis and quantity on the horizontal, and the three cases look completely different.
Some textbooks swap the axes over. Read the labels rather than memorising which way the line points.
WORKED EXAMPLE
Average income in a town rises by 20%. Sales of instant noodles fall from 50,000 packs to 44,000 packs a month. Calculate the YED and classify the good. [3]
Step 1: % change in quantity demanded(44,000 − 50,000) ÷ 50,000 × 100 = −12%Step 2: income change is given+20%Step 3: divideYED = −12 ÷ 20 = −0.6YED = −0.6: an inferior goodThe minus sign is the answer here. Drop it and you have said the opposite of the truth.
Why YED matters
Planning for the business cycle. In a recession incomes fall, so demand for luxuries drops sharply while demand for inferior goods actually rises. Budget supermarkets and discount airlines often do well in a downturn.
Deciding what to invest in. A firm expecting incomes to grow will put money into high-YED products, because those markets expand fastest.
Spreading the risk. A firm selling only luxuries has a fragile revenue stream. Many deliberately sell a budget range alongside a premium one.
Explaining how economies change. As countries grow richer, spending shifts out of agriculture and into manufactured goods and then services. That is YED working across a whole economy, and it is why the service sector expands as development happens.
WORKED EXAMPLE
A recession cuts average incomes by 5%. A budget supermarket chain has a YED of −0.8. Estimate the change in its sales and comment. [3]
Step 1: rearrange the formula% change in QD = YED × % change in incomeStep 2: substitute−0.8 × −5 = +4%Step 3: comment
Sales rise by about 4%. A negative YED means this is an inferior good, so falling incomes push shoppers towards it.
Sales rise roughly 4% during the recessionTwo negatives give a positive. Inferior goods are counter-cyclical.
Watch the wording. “Inferior” is an economics label, not an insult about quality. It only means demand falls when income rises.
🧩 A safe order for any YED question
% change in quantity demanded over the old quantity.
% change in income over the old income.
Divide quantity by income.
Look at the sign: positive means normal, negative means inferior.
If positive, look at the size: under 1 is a necessity, over 1 is a luxury.
Say what it means for the firm or the economy in the question.
💡 Exam tip
Always classify the good after calculating. A number with no label rarely gets full marks.
Keep the sign. YED is the one elasticity where the minus sign carries the meaning.
Use both cut-offs in your description: normal or inferior first, then necessity or luxury.
Link YED to the business cycle in evaluation questions — boom and recession are where it earns its keep.
Remember a good can be normal for one household and inferior for another. Say “for these consumers”.
If a question gives YED and asks for the quantity change, rearrange rather than guessing: %QD = YED × %income.
⚠ Common mix-up
Ignoring the minus sign the way you would with PED. Here it changes the answer completely.
Confusing YED with PED. If the question changes a price, it is PED. If it changes income, it is YED.
Thinking inferior means low quality. It means demand falls as income rises, nothing more.
Assuming every good is normal. Plenty are not, especially budget versions of everyday products.
Calling anything with YED above zero a luxury. It has to be above one.
Reading an Engel curve without checking the axes. Some books put income on the horizontal axis instead.
Up next: Price Elasticity of Supply — we switch sides of the market and ask how quickly producers can react when the price moves.
Want this explained one-to-one?
Book a free session with an experienced IB Economics tutor and get your trickiest topics made simple.
