For which goods, Income elasticity of demand is greater than one ?

Question

Accepted Answer

The correct option is 4: Income Elasticity of Demand (YED) measures the responsiveness of the quantity demanded for a good to a change in consumer income. It is calculated as the percentage change in quantity demanded divided by the percentage change in income. When YED is greater than one (YED \> 1), it signifies that the good is a superior good, specifically a luxury good. For luxury goods, as a consumer's income increases, the demand for these goods increases at a proportionally higher rate. For instance, if income rises by 10%, demand for a luxury item like a designer watch or an exotic vacation might rise by 20% or more. This high sensitivity to income changes is what economists term 'income elastic' demand, making Luxury goods the defining category for YED \> 1. Consumers tend to significantly increase their expenditure on these non-essential, high-end items only after their basic needs have been comfortably met. The incorrect option is 1: Substandard goods (or Inferior goods) have a negative income elasticity of demand (YED \< 0). As consumer income rises, demand for these goods actually falls, because consumers switch to better quality, superior alternatives. The incorrect option is 2: Essential goods (or Necessities) have an income elasticity of demand between zero and one (0 \< YED \< 1). Demand for necessities, such as basic food or housing, rises with income, but proportionally less than the rise in income, as consumers already satisfy most of their basic needs. The incorrect option is 3: Comfortable goods typically fall within the category of normal goods, often showing a positive elasticity (YED \> 0). While they are income-elastic, they generally have an elasticity close to or slightly above one, but are not characterized by the highly elastic YED \> 1 typical of pure luxury goods. They bridge the gap between essentials and pure luxuries.