So here's the formula for you to learn:
Y.E.D. = (% Change in quantity demanded) / (% change in income)
Obviously this is a tool used when analysing if incomes really will affect the demand of a product and it is important to remember that just because income increases doesn't mean that demand for a given product necessarily increases with it. There are three types of good which we look at here and each correspond to a different Y.E.D. figure if you were to calculate it. Therefore examiners love to throw you a figure and it is your job (how wonderful) to identify which type of good the question is referring to.
Normal Goods
Normal goods are easy to deal with. If income increases the demand will also increase for the product. Take HD Ready Televisions for example; If people receive a bigger pay-cheque they may well buy more luxuries that they otherwise couldn't have previously afforded. In the UK it's likely to be an imported one too as people tend to spend surplus incomes on imports (but this is another matter.)
Normal Goods have a positive (+) Y.E.D.
Inferior Goods
Inferior Goods are the opposite. When incomes increase consumers buy less of the product. The ideal example is a Value Range of goods at your local supermarket. As income increases you can afford branded products such as Heinz Baked Beans over Asda Smart Price Beans. And so your consumption of value beans decreases. Hence value beans are an inferior good.
If asked to identify an inferior good, its Y.E.D. is always negative (-)
Essential Goods
The demand for essential goods after a change in incomes are likely to stay the same as income has no impact on the demand for an essential product. The demand for milk or bread is always the same in the short term (obviously population increase affects it in the long term). I'm sure you would buy milk if you lost your job or if you won the Lottery.
Hence for Essential Goods, Y.E.D. = Zero (0).
There you have it... Y.E.D. in a nutshell.
