From iPhones to Aldi essentials: YED in the real world

Picture this, you’re sat in a quiet café on a Saturday morning, coffee in hand, watching people drift in and out. A couple order pastries, someone else grabs a sandwich to go, everything feels normal.

Then you check your phone and a headline flashes up:

“Local workers set to receive pay rises this month.”

You glance back at the counter. If incomes across your town are about to rise, what happens next? Will people buy the premium coffee instead of the basic one? Will more customers order the big breakfast instead of a small snack?

This everyday moment is a simple way to understand income elasticity of demand, or YED.

Before reading on, you may want to watch our explainer video which breaks down YED in a clear and simple way:

What is income elasticity of demand (YED)?

Income elasticity of demand (YED) measures how demand for a product changes when people’s incomes change.

The formula to calculate YED is:

YED = percentage change in quantity demanded ÷ percentage change in income

Understanding this helps us explain why some products become more popular as incomes rise, while others become more popular when incomes fall.

What YED tells us about different products

When you sit in a café, supermarket or high street, you are surrounded by products with different YED values.

They usually fall into three types:

1. Luxury goods (YED > 1): Demand rises more than income rises.Example: premium coffees, designer phones, high-end clothing.

2. Necessities (0 < YED < 1): Demand rises slightly when incomes rise.Example: milk, bread, basic meals.

3. Inferior goods (YED < 0): Demand rises when incomes fall.Example: supermarket value ranges, instant noodles, second-hand goods.

Businesses need to understand these patterns so they can prepare for changes in demand.

Real business examples

Apple and rising incomes

iPhones have a high, positive YED. When incomes rise, demand rises even faster.If a company like Apple sees that incomes are forecast to grow, it can expect more sales of higher-priced models.

McDonald’s during income falls

Many inexpensive McDonald’s meals have low or negative YED.When incomes fall, people often choose cheaper food options. Demand for value meals rises.

Aldi and Everyday Essentials

Aldi’s low-priced products, such as basic pasta or bread, often have negative YED.This means demand increases when incomes fall, as more people look for cheaper alternatives.

Quick examples you can try

Example 1: Income rises by 15 percent and demand for a product rises by 30 percent.

YED = 30 ÷ 15 = 2 → luxury good

Example 2: Income falls by 10 percent and demand rises by 10 percent.

YED = 10 ÷ (−10) = −1 → inferior good

Questions for students to consider

1. Think about your favourite products. Would you buy more, less or the same amount if your income increased? What does this suggest about their YED?

2. Choose a real business (e.g. Apple, McDonald’s, Nike, Aldi). How might its sales change if incomes rise by 5 percent? What about if incomes fall?

3. Why do you think some products have negative YED? Can you think of examples from your own shopping habits?

4. Imagine incomes in your local area fall suddenly. Which shops or products would become more popular? Which ones would suffer?