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3.1 income elasticity_of_demand
 

3.1 income elasticity_of_demand

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income elasticity_of_demand

income elasticity_of_demand

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    3.1 income elasticity_of_demand 3.1 income elasticity_of_demand Presentation Transcript

    • Income Elasticity of Demand
    • iPhone sales set to be huge The iPhone is about to hit UK shelves, with Carphone Warehouse predicting it will be their busiest sales day ever. The Apple product combines a touch- sensitive mobile phone handset with a built-in iPod media player and a wireless internet browser. It is already on eBay.co.uk for up to double the £269 price tag it will carry when it launches at 6.02pm on Friday. Many of the iPhones being sold by UK vendors on the eBay online auction site are described as unlocked, so they can work on any mobile phone network.
    • Aims: To understanding the concept of YeD To have written and numerate understanding of elasticity figures (elastic & inelastic) To understand the implications for revenue and profit (and therefore decision-making);
    • Formula Income elasticity of demand (Yed) measures the relationship between a change in quantity demanded and a change in real income Yed = % change in demand % change in income
    • There are 3 differenttypes of Income Elastic Goods
    • Income Elasticity of Demand: Normal Good – demand rises as income rises and vice versa InferiorGood – demand falls as income rises and vice versa
    • Look out for the sign…!A positive sign (+) denotes a normal goodA negative sign (-) denotes an inferior good
    • The details you need to know Normal goods have a  Luxuries have an income positive income elasticity of elasticity of demand > +1 demand  So the demand rises more As consumers’ income rises, than proportionate to a so more is demanded at each change in income price level  Inferior goods have a negative income elasticity Normal goods have an of demand. income elasticity of demand of between 0 and +1  Demand falls as income rises
    • The detailed knowledge
    • + Positive Income ElasticityA rise in income will cause a rise in demandA fall in income will cause a fall in demand Coffee example…. A 10% increase in income will result in a 2.3% increase in demand for coffee. What’s the YeD? What will this look like on a D & S diagram?
    • Positive Income ElasticDemand Diagram Note the axes are DIFFERENT!
    • Elastic or Inelastic + YeD Elastic goods – are  Inelastic goods – are seen as LUXURIES OR seen as NORMAL or SUPERIOR! NECESSITIES.
    • - Negative Income Elasticity Anincrease in income will result in a decrease in demand.A decrease in income will result in a rise in demand. ALSO known as INFERIOR GOODS
    • Negative Income Elasticity Potatoes are seen as a inferior product Potatoes have a YeD of -0.48 So a 10% rise in incomes will result in???? What would this look like on a D&S diagram?
    • Negative Income ElasticityDiagram = Inferior Note the different axes labels
    • Zero Income Elasticity This occurs when a change in income has NO effect on the demand for goods. A rise of 5% income in a rich country will leave the Demand for toothpaste unchanged!
    • So to summarise
    • Look for the signs!NORMAL GOODS  LUXURY GOODS + BETWEEN 0 & 1 +0.5 +0.9 + 0.1 + GREATER THAN 1 +2 +5 +27 INFERIOR GOODS - CAN BE A DECIMAL OR A VALUE GREATER THAN 1
    • For example: Yed = - 0.6:  Yed = + 1.6: Good is an inferior good but Good is a normal good and inelastic elastic a rise in income of 10% would  a rise in incomes of 10% lead to demand falling by 6% would lead to demand rising by 16% Yed = + 0.4: Good is a normal good but  Yed = - 2.1: inelastic Good is an inferior good a rise in incomes of 10% would and elastic lead to demand rising by 4%  a rise in incomes of 10% would lead to a fall in demand of 21%
    • So what’s a Normal, aLuxury and an Inferior good? In groups of 3’s … You will each be ‘given’ a set of goods and you have to decide whether each is a normal, luxury or an inferior good…
    • You decide…. Bus travel  Margarine Cigarettes  Stilton Designer clothes  Private education Fine wines  Private health care Fresh vegetables  Stringy cheese Frozen vegetables  Rail travel Fruit juice Instant coffee  Shampoo International air travel  Tinned meat Luxury chocolates  Value “own-brand” bread
    • So which would have a a++value So which would have value So which would have a negative GREATER THAN good? 0 AND 1? BETWEEN inferior 1? – value? i.e. an i.e. a a LUXURY good? i.e. NORMAL good? Bus travel  Margarine Cigarettes  Natural cheese Designer clothes  Private education Fine wines  Private health care Fresh vegetables  Processed cheese Frozen vegetables  Rail travel Fruit juice  Shampoo Instant coffee  Tinned meat International air travel  Value “own-brand” bread Luxury chocolates
    • A Diagram for you…
    • Relationship between Incomeand Quantity Demanded Quantity Zero income elastici ty Positive income elasticity Negative income elasticity [inferior good] 0 y1 y2 Income
    • Income Elasticity of Demand forChocolate Which country has the sweeter tooth when it comes toTotal consumption income elasticity for USA 0.79 chocolate?? Germany 0.39 United Kingdom 0.44 France 0.60 Japan 0.08 Switzerland 1.06Reference: Henri Jason Trends in cocoa and chocolate consumption with particular reference to developments in the major markets. Malaysian International Cocoa Conference, Kuala Lumpur, 20-21 October 1994 (ICCO, ED(MEM) 686)
    • Income Elasticity and theDemand for Airline Travel Demand for air travel has a positive income elasticity of demand The industry is cyclical  During an upturn, demand rises for business and leisure travel)  During a recession, the demand tails away In the long run, there is a positive relationship between real GDP per capita and the demand for air travel Income elasticity will vary according to the type of air travel  E.g. difference between low-cost “no-frills” and higher priced scheduled services on low-haul flights
    • Examples of YeD YeD mantra… + = normal - = inferior!For example: Yed = - 0.6: Good is an inferior good but inelastic – a rise in income of 10% would lead to demand falling by 6% Yed = + 0.4: Good is a normal good but inelastic – a rise in incomes of 10% would lead to demand rising by 4% Yed = + 1.6: Good is a normal good and elastic – a rise in incomes of 10% would lead to demand rising by 16% Your handout has different figures… Yed = - 2.1: Good is an inferior goodannotate these to your and elastic – a rise in handout incomes of 10% would lead to a fall in demand of 21%
    • Income Per Capita and Airline 100000 Travel by Country Singapore Hong Kong China 10000 New Zealand US Australia Sw itzerland NetherlandsASK (000) per capita Israel Canada Denmark Ecuador UK Norw ay Spain France Japan Malaysia Finland Saudi Arabia Greece Ireland eden Belgium Thailand Portugal Sw Germany Austria 1000 Dominican Rep Panama Korea Rep S. Africa Italy Lebanon Chile Costa Rica Mexico Peru Brazil Venezuela Philippines TunisiaHungary Argentina Sri Lanka Colombia Why do you think Kenya Zimbabw e Bulgaria Turkey Czech Rep Uruguay New Zealand, Cote DIvoireSyria Croatia Slovenia Lithuania Australia, Hong Kong PakistanParaguay Romania Poland 100 and Singapore are VietnamChinaAlgeria Iran above the trend line? Cameroon Belarus India Ukraine Nigeria Bangladesh 10 0 5000 10000 15000 20000 25000 30000 35000 GNP per capita ($ PPP)
    • Airlines – a Highly CyclicalIndustry What does this mean? Real GDP growth Global air traffic % year on year % year on year 8 16 World real GDP growth (% vly) World scheduled airline RPKs (% vly) 14 7 12 6 10 5 8 4 6 4 3 2 2 0 1 -2 0 -4 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001
    • Significance of Income Elasticity of Demand High Income Elasticity  Demand is sensitive to changes in real incomes  Demand is therefore cyclical – in an economic expansion, demand will grow strongly. In a recession demand may fall  Can be difficult for businesses to accurately forecast demand and make capital investment decisions
    • Significance of Income Elasticity of Demand Low Income Elasticity  Demand is more stable during fluctuations in the economic cycle  Over time, the share of consumer spending on inferior goods and normal necessities tends to decline  Long run – businesses need to invest in / focus on products with a higher income elasticity of demand if they want to increase total profits
    • Practice time…. This is NOT exam practice!The exam paper will NOT look like this!
    • Income elasticity of demandsin a recession Define YeD Product YeD What is the formula? Luxury choc 2.4 Whisky 4.1 What type of YeD would you expect a Digestive 0.6 luxury good should Biscuits have? Apples 0.2 Identify the different Own brand -0.4 types of YeD in the baked beans table…
    • Income elasticity of demandsin a recession Estimate the effect a Product YeD 5% fall in income would have on each product. Luxury choc 2.4 Whisky 4.1 Estimate the effect a 15% increase in Digestive 0.6 income would have on Biscuits each product. Apples 0.2 Own brand -0.4 baked beans
    • HomeworkRED sheetComplete Questions