Income Elasticity of Demand (YED) measures demand responsiveness to income changes. Formula: YED = % Change in Quantity Demanded / % Change in Income. Positive YED: Normal goods (superior, demand increases with income—cars, quality food). Negative YED: Inferior goods (demand decreases with income—low-quality food, second-hand goods). Magnitude interpretation: >1 (luxury goods—demand rises faster than income), <1 (necessity—demand rises slower than income). Examples: Luxury cars (YED=2+, high responsiveness), wheat flour (YED<1, necessity). Business implication: Growing economy benefits sellers of normal goods; recession affects demand for luxuries more. Income classification: High-income consumers prefer normal goods; low-income consumers buy inferior goods due to constraints. Indian context: Rising incomes increase demand for branded goods, higher-quality food, automobiles. ICAI distinction: Income changes cause shifts in demand, YED measures magnitude. Exam tip: Remember the terms: positive YED means normal goods (good news), negative YED means inferior goods (defective/low-quality).