A Level Economics AQA Practice Exam

How is income elasticity of demand (YED) calculated?

1. % change in quantity demanded / % change in price

2. % change in quantity demanded / % change in income

3. % change in income / % change in quantity supplied

4. % change in price / % change in quantity demanded

The correct answer is: % change in quantity demanded / % change in income

The calculation of income elasticity of demand (YED) specifically looks at how the quantity demanded of a good responds to changes in consumer income. The correct method for this calculation involves taking the percentage change in quantity demanded and dividing it by the percentage change in income. Understanding YED is crucial in distinguishing between different types of goods. For example, if YED is greater than 1, the good is considered a luxury good, meaning that as income increases, the quantity demanded increases at an even higher rate. If YED is between 0 and 1, the good is termed a necessity, where demand increases, but at a lower rate than income. A negative YED indicates an inferior good, where an increase in income results in a decrease in quantity demanded. Other options listed refer to different economic concepts. For instance, the option discussing percentage changes in price relates to price elasticity of demand, which assesses how demand changes in response to price variations. The remaining options concerning changes in quantity supplied and price do not pertain to YED at all, as they address different areas of economic analysis, such as supply elasticity. Therefore, the method for calculating income elasticity of demand specifically aligns with the correct choice, focusing solely on the relationship between demand and income