Syllabus: Pearson Edexcel AS Business
Module: The Market
Lesson: 1.2.5 Income Elasticity of Demand

Introduction

This Pearson Edexcel AS Business lesson on Income Elasticity of Demand (YED) is part of Theme 1: Marketing and People. Sitting within Topic 1.2 The Market, it builds on students’ understanding of demand and elasticity to explore how income changes affect consumer behaviour.

Understanding YED helps students analyse how businesses anticipate sales shifts across economic cycles – crucial for both pricing and product development strategies. The topic aligns strongly with Assessment Objective 1 (knowledge and understanding) and AO2 (application), with room for AO3 analysis in structured questions or case study responses.

Key Concepts

• Definition of Income Elasticity of Demand (YED):
  Measures the responsiveness of quantity demanded to a change in consumer income.
• YED = % change in quantity demanded / % change in income
• Types of Goods Based on YED:
  • Normal Goods (YED > 0): Demand rises as income increases.
  • Inferior Goods (YED < 0): Demand falls as income increases.
  • Luxury Goods (YED > 1): Demand increases more than proportionally to income.
• Elastic vs Inelastic YED:
  • Income Elastic (YED > 1) – luxury holidays, designer clothes.
  • Income Inelastic (0 < YED < 1) – groceries, utility bills.
• Implications for Businesses:
  • Sales forecasting and product planning
  • Risk management during economic cycles
  • Market segmentation and targeting strategies
• Key Diagrams:
  • Demand curves shifting with changes in income
  • Annotated YED formula with example calculations

Real-World Relevance

Understanding income elasticity has become more pressing in a post-COVID and cost-of-living crisis economy. Consider:

• Greggs thrived during economic downturns by offering affordable alternatives – classic inferior goods.
• John Lewis and other department stores offering luxury items have seen variable performance, highlighting how luxury brands are exposed to income-sensitive demand.
• Netflix’s shift toward lower-cost ad-supported plans mirrors a response to rising demand for income inelastic alternatives in recessionary conditions.

Encouraging students to analyse businesses like these connects theory to current headlines and shows elasticity in action.

How It’s Assessed

This content typically appears in Paper 1, which covers Marketing and People. Students are likely to encounter:

• Calculation Questions:
  “Calculate the YED for a product where income rises by 10% and demand increases by 15%.”
• Interpretation and Application Questions:
  “Explain what a YED of -0.6 means for a supermarket’s budget brand range.”
• Extended Response/Analysis:
  “Assess the usefulness of income elasticity of demand for a business planning to launch a luxury product during a period of economic uncertainty.”

Command words include “Calculate”, “Explain”, “Analyse”, and occasionally “Evaluate” in 8–10 mark questions.

Enterprise Skills Integration

Income elasticity has strong links to several Enterprise Skills:

• Decision-Making:
  Should a business invest in a luxury line or a budget range? YED data guides this.
• Problem-Solving:
  How can a business protect itself from income-related demand swings?
• Communication:
  Students must clearly explain the logic of elasticity impacts, an essential business skill.

Enterprise Skills Tool Suggestion:
Try using MarketScope AI to model how changes in income levels affect product categories. Students can input mock data to test sensitivity across normal vs luxury goods.

Careers Links

This lesson supports Gatsby Benchmark 4 by grounding economics in real-world job roles:

• Marketing Analysts use YED data to forecast product performance under changing income conditions.
• Business Development Managers assess which markets (premium vs budget) offer safer returns during economic uncertainty.
• Retail Buyers decide stock levels based on how income-sensitive different products are.

It also reinforces broader skills valued in consultancy, finance, and consumer behaviour roles.

Teaching Notes

From the Classroom Floor:

• Quick Starter:
  Ask students to name five products they think are luxury goods. Then challenge them: would demand for these rise or fall if incomes halved?
• Diagram Practice:
  Have students draw demand curve shifts for income increases on both normal and inferior goods.
• Stretch Task:
  Compare YED with PED (Price Elasticity of Demand). How should a business approach pricing and product design if a good is income inelastic but price elastic?
• Pitfalls to Watch For:
  • Confusing income elasticity with price elasticity
  • Misinterpreting negative YED values
  • Assuming all inferior goods are low quality

Support from the Empathy Map:

Teachers value time-saving, ready-to-go activities that actually build understanding, not just tick a box​. This lesson lends itself well to visual and interactive methods. SLT and careers leads want to see careers relevance without turning lessons into careers talks​​. That’s why embedding employer roles into examples (e.g., “What would a Tesco buyer do with this data?”) hits the mark.