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Income elasticity of demand

Income elasticity of demand (YED) measures how the quantity demanded of a good changes in response to a change in consumer income. It is calculated as the percentage change in quantity demanded divided by the percentage change in income. Goods can be classified based on their YED: normal goods have positive YED (demand rises with income), while inferior goods have negative YED (demand falls as income rises).

In the UK, Tesco’s Finest range is a good example of a product with high income elasticity—when people’s incomes increase, they may choose premium groceries over basic alternatives. Conversely, own-brand supermarket products(e.g., Tesco Value or Asda Smart Price) often have negative income elasticity. During economic downturns, consumers may switch to these cheaper goods, but return to branded or premium items when income rises.

YED helps businesses and policymakers understand consumer behaviour during different stages of the economic cycle.