hi there in this short topic video we're going to take a look at the concept of income elasticity of demand now what would happen to what you spend your money on your demand for products and services if your income significantly increased let's say by 50% what would you spend more on what would you spend less on would you start to switch from one product to another perhaps transfer from one brand to another that's the kind of question that markers need to consider when they are thinking about the income elasic of demand for their products and services you may have heard of this concept already of elasticity you may have come across it in the context of price elasticity and what we're doing with income is simply looking at the responsiv of demand to a different variable in this case incomes so income elasticity demand looks at the responsiveness of demand to a change in incomes so it measures the extent to which quantity demanded changes in response to a change in income so you can see from that from that definition that we are going to be looking at percentage changes again in the same way that we do when we look at price elasticity income elasticity of demand is usually shortened to IED and it's calculated by comparing two percentage changes we look at the percentage change in quantity demanded and we divide divide that by the percentage change in income the percentage change in quantity demanded is divided by the percentage change in income to give us the income elasticity number let's look at a simple example here let's imagine a product product X and uh where incomes in the economy are £20,000 on average we find that 10 million units of product X are demanded by the market so that's our starting point now let's see what happens to demand for product X as incomes rise and in this case we see that incomes have risen from 20,000 to £22,000 and there has been an increase in the demand for product decks from 10 million to 12 million units now if you want pause the uh the video here and have a go calculating the percentage changes in demand and income after having calculated the change in demand and when you're ready start it again and I'll go through the calculations so let's have a look well first of all we look at the percentage change in demand and in this case it's gone up by 2 million units from 10 to 12 uh to calculate the percentage change in demand we divide the change which is 2 million by the original figure which was 10 million that's 2 over 10 times by 100 gives you a percentage change and increase in demand of 20 % let's have a look at the change in income incomes have risen from 20,000 to 22,000 that's at increase of 2,000 2,000 divided by the original income of 20,000 that means a percentage increase of 10% in incomes so we can see from that that demand has risen by 20% after incomes Rose by 10% to calculate income elasticity we simply divide the percentage change in quantity demanded by the percentage change in income that's 20 divided by 10 gives you an income elasticity of two hopefully you can see how we calculate that now what does this mean well with income elasticity we tend to make a distinction between what I known as luxury products and Necessities luxury products uh are where the income elasticity more than one in other words when incomes Rise by a certain percentage demand for these products these so-called luxuries Rises by more but than the change in incomes so as incomes grow proportionately more of that income is spent on these luxury products conversely where income elasticity is less than one but importantly more than zero as income grows demand Rises but not by as much as a percentage change in income so as income grows proportionately less is spent on Necessities demand for them still grows but not by as much as the percentage change now what do we mean by these luxuries and Necessities well luxuries might include things like branded Goods branded products as your income Rises you're more able to afford branded products and maybe you spend proportionately more of the extra money in your pocket on those products as the amount in your pocket or your wallet or purse increases you're going to spend proportionately Less on these Necessities the things that you had to buy in the first place but you're not going to buy much more of so milk maybe discounted or own Lael products most normal products see an increase in demand when there is increase in income the only distinction is how much the increase is so a rise in income will result in a riseing in demand and similarly if incom start falling as of course happens in some circumstance ances particularly during a recession we see there is a fall in demand for products and the extent to which this happens is known as the income elasticity there is one product there one type of product just to remember which is a thing called an inferior good this is quite an unusual one but if you think about it it makes sense an inferior good has can have a negative income elasticity in other words as incomes rise demand actually starts to fall and uh conversely as incomes fall demand can start to rise and we see this in the case of what's known as inferior Goods uh and the reason for this is that they are products where consumers will switch either into them if their incomes are falling or definitely switch out to them as their incomes are rising and we've seen this haven't we with the rise of the discount retailers during the recession significant switch to value for money products which saw their demand r R when incomes were falling and of course in Good Times maybe demand for those products is not as quite as strong it starts to fall that's been a brief introduction to and an explanation of the concept of income elasticity of demand