How does YED help in distinguishing between normal and inferior goods?

YED, or income elasticity of demand, helps distinguish between normal and inferior goods by indicating how demand changes with income.

YED, or income elasticity of demand, is a measure used in economics to show how the quantity demanded of a good can change when a consumer's income changes. It is calculated by dividing the percentage change in quantity demanded by the percentage change in income. The resulting figure can help us distinguish between normal and inferior goods.

Normal goods are those for which demand increases as income increases. This means that as consumers become wealthier, they buy more of these goods. In terms of YED, normal goods have a positive income elasticity of demand. This is because the percentage change in quantity demanded is greater than the percentage change in income, resulting in a YED greater than zero. Examples of normal goods could include holidays, cars, and restaurant meals.

On the other hand, inferior goods are those for which demand decreases as income increases. As consumers become wealthier, they buy less of these goods, opting instead for more expensive or higher quality alternatives. In terms of YED, inferior goods have a negative income elasticity of demand. This is because the percentage change in quantity demanded is less than the percentage change in income, resulting in a YED less than zero. Examples of inferior goods could include budget supermarket products or second-hand clothes.

Therefore, by calculating the YED for a good, we can determine whether it is a normal or an inferior good. If the YED is positive, the good is a normal good, as demand for it increases with income. If the YED is negative, the good is an inferior good, as demand for it decreases with income. This can be particularly useful for businesses in predicting how changes in the economy, such as a rise or fall in average income, might affect the demand for their products.