What is YED in the context of IB DP Economics?

YED, or Income Elasticity of Demand, is a measure used in microeconomics to show how the quantity demanded of a good responds to a change in consumer income. It is an important concept in the IB DP Economics curriculum as it helps students understand how different goods are affected by changes in income levels.

How is YED calculated in microeconomics?

YED is calculated using the formula: YED = (% Change in Quantity Demanded) / (% Change in Income). This formula helps determine whether a good is a normal good, inferior good, or luxury good based on how demand changes with income variations.

What does a positive YED indicate about a good?

A positive YED indicates that the good is a normal good, meaning that as consumer income increases, the demand for the good also increases. This is a key concept in microeconomics, particularly in the IB DP curriculum, as it helps classify goods based on consumer behavior.

Why is understanding YED important for businesses?

Understanding YED is crucial for businesses as it helps them predict how changes in the economy, specifically consumer income, will affect the demand for their products. This knowledge allows businesses to make informed decisions about pricing, production, and marketing strategies.

How does YED differ between luxury goods and inferior goods?

For luxury goods, YED is typically greater than 1, indicating that demand increases more than proportionally as income rises. In contrast, inferior goods have a negative YED, meaning that demand decreases as income increases. This distinction is important in microeconomics and is covered in the IB DP Economics syllabus to help students understand consumer behavior.

Why is "Forgetting the SIGN of YED matters." a common mistake in YED?

Why it happens: Focusing on magnitude only. How to avoid it: Negative YED = INFERIOR. Positive but small = necessity. Positive and large = luxury. Sign first, then magnitude.

Why is "Stating Engel's law means food spending FALLS as income rises." a common mistake in YED?

Why it happens: Misreading 'share'. How to avoid it: Absolute food spending may RISE. Engel's law says the SHARE (proportion) falls.

MicroeconomicsIB Economics SL

YED

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Income Elasticity of Demand (YED) — IB Economics SL: formula, normal vs inferior goods, sectoral implications

Unit 2.5 of the 2022+ syllabus. YED measures how demand responds to changes in consumer income. Distinguishes normal goods (necessities, luxuries) from inferior goods.

What you’ll learn

Mapped to the IB DP Economics SL subject guide (2022 onwards (first assessment May 2024)).

2.5.5 — Calculate YED.
2.5.6 — Classify goods using YED.
2.5.7 — Apply YED to sectoral change in developing economies.

YED formula, classification, applications

Income responsiveness.

Income Elasticity of Demand (YED):

$YED = \frac{\% \Delta Q_d}{\% \Delta Y}$

(Y is the symbol for income.)

Classification by YED sign and magnitude:

YED value	Type of good	Example
YED < 0	Inferior	Instant noodles, second-hand clothes, public bus rides
0 < YED < 1	Normal necessity	Bread, basic clothing, electricity
YED > 1	Normal luxury	Luxury cars, premium travel, fine dining

Worked example. Average income rises by 10%. Demand for organic food rises by 15%. YED = 15/10 = 1.5 → organic food is a normal LUXURY.

Engel's law. Empirical observation that as incomes rise, the SHARE of income spent on food FALLS (even though absolute food spending may rise). Reflects YED < 1 for food in aggregate.

Sectoral implications. As a country develops and average income rises:

Demand for agriculture (food) grows slower than income → agriculture's share of GDP falls.
Demand for manufactured goods grows roughly with income.
Demand for services (healthcare, entertainment, finance) grows FASTER than income (high YED) → services share rises.

This explains the typical pattern of structural transformation: agriculture → manufacturing → services share of GDP.

Business application. A firm selling income-elastic luxuries can expect demand to GROW STRONGLY in a boom and shrink sharply in a recession. A firm selling necessities sees demand fluctuate less — but doesn't enjoy boom expansions.

YED = %ΔQd ÷ %ΔY.
YED < 0: inferior; 0-1: necessity; >1: luxury.
Engel's law: food share falls as income rises.
Structural transformation: agriculture → manufacturing → services.

How it’s examined

Paper 1: 'Distinguish normal and inferior goods using YED.' Paper 2: classify goods and predict revenue change during income growth.

Sources: IB Diploma Programme Economics subject guide (IBO, 2020 — first assessment 2022). Last reviewed 2026-05-31.

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Step-by-step worked examples — YED

Step-by-step solutions to past-paper-style questions on yed, written exactly the way a tutor would explain them at the board.

1Classify by YED
Building confidence• YED
Question
Income rises 8%. Compute YED and classify: (a) demand for luxury cars rises 16%; (b) demand for rice falls 4%. (4 marks)
Step-by-step solution
1. Step 1
  (a) YED = +16% / +8% = +2.0. Positive and > 1 → LUXURY (income-elastic normal good).
2. Step 2
  (b) YED = −4% / +8% = −0.5. Negative → INFERIOR good.
Answer
(a) YED = 2.0 (luxury); (b) YED = −0.5 (inferior).
2Engel's law and structural change
Stretch• development
Question
Explain how Engel's law contributes to falling agriculture share of GDP as countries develop. (4 marks)
Step-by-step solution
1. Step 1
  Engel's law: as income rises, share of income spent on food falls (YED for food < 1).
2. Step 2
  Total agricultural demand grows slower than income/GDP.
3. Step 3
  Meanwhile manufactured goods and services have higher YED → grow faster than GDP.
4. Step 4
  Agriculture's RELATIVE share of GDP therefore declines, even as absolute output may rise.
Answer
Low YED for food → agricultural demand grows slower than overall income → falling share of GDP.
3Business implications of YED
Building confidence• business
Question
A discount supermarket has many products with YED close to 0 or negative. Predict what happens to its sales during a recession. (2 marks)
Step-by-step solution
1. Step 1
  In a recession, incomes fall. Inferior goods (YED < 0) see RISING demand.
2. Step 2
  Discount supermarkets often see sales RISE as consumers trade down from premium retailers.
Answer
Sales likely rise — inferior-good demand increases in a recession.

Key Definitions and Keywords — YED

Definitions to memorise and the exact keywords mark schemes credit for yed answers — sharpened from recent examiner reports for the 2026 IB DP Economics SL sitting.

Income elasticity of demand (YED)
Examiner keyword
Responsiveness of quantity demanded to a change in income.
Inferior good
Examiner keyword
Good for which demand falls as income rises; YED < 0.
Luxury (income-elastic normal good)
Examiner keyword
Good for which demand rises proportionally more than income; YED > 1.

Common Mistakes and Misconceptions — YED

The traps other students keep falling into on yed questions — taken from recent IB DP Economics SL examiner reports and mark schemes — and how to avoid them.

✕Forgetting the SIGN of YED matters.
Why it happens
Focusing on magnitude only.
How to avoid it
Negative YED = INFERIOR. Positive but small = necessity. Positive and large = luxury. Sign first, then magnitude.
✕Stating Engel's law means food spending FALLS as income rises.
Why it happens
Misreading 'share'.
How to avoid it
Absolute food spending may RISE. Engel's law says the SHARE (proportion) falls.

Past paper style quiz

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YED — frequently asked questions

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YED

Short Study Notes in the form of Slides

Short Study Notes — YED

Detailed Notes

What you’ll learn

How it’s examined

1Classify by YED

2Engel's law and structural change

3Business implications of YED

Income elasticity of demand (YED)

Inferior good

Luxury (income-elastic normal good)

✕Forgetting the SIGN of YED matters.

✕Stating Engel's law means food spending FALLS as income rises.

Past paper style quiz

YED — frequently asked questions