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The formula for measuring Income Elasticity of Demand (YED) is: $$\text{YED} = \frac{\Delta Q}{\Delta Y} \times \frac{Y_1 + Y_2}{Q_1 + Q_2}$$ (i) Explain what each of the above symbols represent - Leaving Cert Economics - Question c - 2017
Question c
The formula for measuring Income Elasticity of Demand (YED) is: $$\text{YED} = \frac{\Delta Q}{\Delta Y} \times \frac{Y_1 + Y_2}{Q_1 + Q_2}$$ (i) Explain what each... show full transcript
Worked Solution & Example Answer:The formula for measuring Income Elasticity of Demand (YED) is: $$\text{YED} = \frac{\Delta Q}{\Delta Y} \times \frac{Y_1 + Y_2}{Q_1 + Q_2}$$ (i) Explain what each of the above symbols represent - Leaving Cert Economics - Question c - 2017
Step 1
Explain what each of the above symbols represent.
Answer
In the formula for Income Elasticity of Demand (YED):
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: This represents the change in the quantity demanded of the good. It indicates how much the demand for a product changes in response to changes in income.
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: This symbolizes the change in the income of the consumer. It captures the variation in consumer income, which affects their purchasing behavior.
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: This is the original income of the consumer before the change occurs. It establishes the baseline income level for the analysis.
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: This represents the new/current income of the consumer after the income change. It shows the updated income level used for calculating the YED.
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: This is the original quantity of the good demanded before the income change. This serves as the baseline quantity for the goods in question.
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: This indicates the new/current quantity of the good demanded after the change in income. It provides the updated demand level for the calculation.
Step 2
Would you consider the Apple iPhone 7 to be a luxury good, based on your knowledge of YED? Explain your answer.
Answer
The Income Elasticity of Demand (YED) for the Apple iPhone 7 is +2.8, which indicates that it is a luxury good.
Luxury goods are typically defined as those goods for which the percentage increase in quantity demanded is greater than the percentage increase in income. Given that the YED is greater than 1, it implies that the quantity demanded for the iPhone 7 increases more than proportionately in response to an increase in consumer income.
In summary, since the YED is significantly greater than 1, we classify the Apple iPhone 7 as a luxury good based on the income elasticity measurement.