Description
concept of income elasticity of demand, written and numerate understanding of elasticity figures (elastic & inelastic) and to understand the implications for revenue and profit (and therefore decision-making);
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. sensitive mobile phone handset with a built-in iPod media player and a wireless internet browser. double the £269 price tag it will carry when it launches at 6.02pm on Friday.
? The Apple product combines a touch-
? It is already on eBay.co.uk for up to
? 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 different types of Income Elastic Goods
Income Elasticity of Demand:
? Normal Good – demand rises as income rises and
vice versa
? Inferior Good – 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
positive income elasticity of demand
? Luxuries have an income
elasticity of demand > +1
? So the demand rises more ? As consumers’ income rises,
so more is demanded at each price level
than proportionate to a change in income
? Inferior goods have a
? Normal goods have an income
elasticity of demand of between 0 and +1
negative income elasticity of demand.
? 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 Elastic Demand Diagram
? Note the axes are DIFFERENT!
Elastic or Inelastic + YeD
? Elastic goods – are seen ? Inelastic goods – are
as LUXURIES OR SUPERIOR!
seen as NORMAL or NECESSITIES.
demand.
Negative Income Elasticity
? An increase in income will result in a decrease in
? 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 Elasticity Diagram = 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 inelastic ? a rise in income of 10% would lead to demand falling by 6%
? Yed = + 0.4:
Good is a normal good and elastic ? a rise in incomes of 10% would lead to demand rising by 16%
? Yed = - 2.1:
Good is a normal good but inelastic ? a rise in incomes of 10% would lead to demand rising by 4%
Good is an inferior good and elastic ? a rise in incomes of 10% would lead to a fall in demand of 21%
So what’s a Normal, a Luxury 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 ? Cigarettes ? Designer clothes ? Fine wines ? Fresh vegetables ? Frozen vegetables ? Fruit juice
? Margarine ? Stilton ? Private education ? Private health care ? Stringy cheese ? Rail travel ? Shampoo ? Tinned meat ? Value “own-brand” bread
? Instant coffee
? International air travel ? Luxury chocolates
So which would have negative value So which would have aa++value – So which would have a GREATER AND 1? BETWEEN 0THAN1? value? i.e. an inferior good? i.e. NORMAL good? i.e. a a LUXURY good?
? ? ? ? ? ? ? ? ?
?
Bus travel Cigarettes Designer clothes Fine wines Fresh vegetables Frozen vegetables Fruit juice Instant coffee International air travel Luxury chocolates
? ? ? ? ? ? ? ? ?
Margarine Natural cheese Private education Private health care Processed cheese Rail travel Shampoo Tinned meat Value “own-brand” bread
A Diagram for you…
Relationship between Income and Quantity Demanded
Quantity
Zero income elastici ty
Positive income elasticity
Negative income elasticity [inferior good]
0
y1
Income
y2
Income Elasticity of Demand for Chocolate
Total consumption ? USA 0.79 ? Germany 0.39 ? United Kingdom 0.44 ? France 0.60 ? Japan 0.08 ? Switzerland 1.06
Which country has the sweeter tooth when it comes to income elasticity for chocolate??
Reference: 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 the Demand 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
For example:
?
YeD mantra… + = normal - = inferior!
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% Yed = - 2.1: Good is an inferior incomes of 10% would lead to a fall in demand of 21%
Your handout has different figures…annotate these to your handout good and elastic – a rise
?
?
?
in
Income Per Capita and Airline Travel by Country
100000
Singapore Hong Kong China
10000
New Zealand
Australia
US
Switzerland
Netherlands Canada Denmark UK Norway France Spain Japan Finland Malaysia Belgium Saudi Arabia Greece Ireland Germany Sweden Portugal Austria Thailand Panama Korea Rep Dominican Rep 1000 Italy Lebanon S. Africa Chile Costa Rica Brazil Mexico Peru Venezuela Philippines Hungary Argentina Tunisia Sri Lanka Colombia Czech Rep Zimbabwe Kenya Bulgaria Turkey Uruguay Croatia Cote D'Ivoire Slovenia Syria Lithuania Pakistan Poland Paraguay Romania 100 China Vietnam Algeria Iran Cameroon Belarus India Ukraine Nigeria Bangladesh
Ecuador Israel
ASK (000) per capita
Why do you think New Zealand, Australia, Hong Kong and Singapore are above the trend line?
10 0 5000 10000 15000 20000 25000 30000 35000
GNP per capita ($ PPP)
Airlines – a Highly Cyclical What does this Industry mean?
Real GDP growth % year on year Global air traffic % year on year
8 7 6
World real GDP growth (% vly) World scheduled airline RPKs (% vly)
16 14 12 10
5 4 3 2
8 6 4 2 0
1 0
1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999
-2 -4
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 demands in a recession
? Define YeD
Product
Luxury choc Whisky Digestive Biscuits Apples
YeD 2.4 4.1 0.6 0.2
? What is the formula?
? What type of YeD would
you expect a luxury good should have?
? Identify the different
types of YeD in the table…
Own brand baked beans
-0.4
Income elasticity of demands in a recession
? Estimate the effect a 5%
Product
Luxury choc Whisky Digestive Biscuits Apples
YeD 2.4 4.1 0.6 0.2
fall in income would have on each product.
? Estimate the effect a
15% increase in income would have on each product.
Own brand baked beans
-0.4
doc_437427036.pptx
concept of income elasticity of demand, written and numerate understanding of elasticity figures (elastic & inelastic) and to understand the implications for revenue and profit (and therefore decision-making);
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. sensitive mobile phone handset with a built-in iPod media player and a wireless internet browser. double the £269 price tag it will carry when it launches at 6.02pm on Friday.
? The Apple product combines a touch-
? It is already on eBay.co.uk for up to
? 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 different types of Income Elastic Goods
Income Elasticity of Demand:
? Normal Good – demand rises as income rises and
vice versa
? Inferior Good – 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
positive income elasticity of demand
? Luxuries have an income
elasticity of demand > +1
? So the demand rises more ? As consumers’ income rises,
so more is demanded at each price level
than proportionate to a change in income
? Inferior goods have a
? Normal goods have an income
elasticity of demand of between 0 and +1
negative income elasticity of demand.
? 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 Elastic Demand Diagram
? Note the axes are DIFFERENT!
Elastic or Inelastic + YeD
? Elastic goods – are seen ? Inelastic goods – are
as LUXURIES OR SUPERIOR!
seen as NORMAL or NECESSITIES.
demand.
Negative Income Elasticity
? An increase in income will result in a decrease in
? 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 Elasticity Diagram = 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 inelastic ? a rise in income of 10% would lead to demand falling by 6%
? Yed = + 0.4:
Good is a normal good and elastic ? a rise in incomes of 10% would lead to demand rising by 16%
? Yed = - 2.1:
Good is a normal good but inelastic ? a rise in incomes of 10% would lead to demand rising by 4%
Good is an inferior good and elastic ? a rise in incomes of 10% would lead to a fall in demand of 21%
So what’s a Normal, a Luxury 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 ? Cigarettes ? Designer clothes ? Fine wines ? Fresh vegetables ? Frozen vegetables ? Fruit juice
? Margarine ? Stilton ? Private education ? Private health care ? Stringy cheese ? Rail travel ? Shampoo ? Tinned meat ? Value “own-brand” bread
? Instant coffee
? International air travel ? Luxury chocolates
So which would have negative value So which would have aa++value – So which would have a GREATER AND 1? BETWEEN 0THAN1? value? i.e. an inferior good? i.e. NORMAL good? i.e. a a LUXURY good?
? ? ? ? ? ? ? ? ?
?
Bus travel Cigarettes Designer clothes Fine wines Fresh vegetables Frozen vegetables Fruit juice Instant coffee International air travel Luxury chocolates
? ? ? ? ? ? ? ? ?
Margarine Natural cheese Private education Private health care Processed cheese Rail travel Shampoo Tinned meat Value “own-brand” bread
A Diagram for you…
Relationship between Income and Quantity Demanded
Quantity
Zero income elastici ty
Positive income elasticity
Negative income elasticity [inferior good]
0
y1
Income
y2
Income Elasticity of Demand for Chocolate
Total consumption ? USA 0.79 ? Germany 0.39 ? United Kingdom 0.44 ? France 0.60 ? Japan 0.08 ? Switzerland 1.06
Which country has the sweeter tooth when it comes to income elasticity for chocolate??
Reference: 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 the Demand 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
For example:
?
YeD mantra… + = normal - = inferior!
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% Yed = - 2.1: Good is an inferior incomes of 10% would lead to a fall in demand of 21%
Your handout has different figures…annotate these to your handout good and elastic – a rise
?
?
?
in
Income Per Capita and Airline Travel by Country
100000
Singapore Hong Kong China
10000
New Zealand
Australia
US
Switzerland
Netherlands Canada Denmark UK Norway France Spain Japan Finland Malaysia Belgium Saudi Arabia Greece Ireland Germany Sweden Portugal Austria Thailand Panama Korea Rep Dominican Rep 1000 Italy Lebanon S. Africa Chile Costa Rica Brazil Mexico Peru Venezuela Philippines Hungary Argentina Tunisia Sri Lanka Colombia Czech Rep Zimbabwe Kenya Bulgaria Turkey Uruguay Croatia Cote D'Ivoire Slovenia Syria Lithuania Pakistan Poland Paraguay Romania 100 China Vietnam Algeria Iran Cameroon Belarus India Ukraine Nigeria Bangladesh
Ecuador Israel
ASK (000) per capita
Why do you think New Zealand, Australia, Hong Kong and Singapore are above the trend line?
10 0 5000 10000 15000 20000 25000 30000 35000
GNP per capita ($ PPP)
Airlines – a Highly Cyclical What does this Industry mean?
Real GDP growth % year on year Global air traffic % year on year
8 7 6
World real GDP growth (% vly) World scheduled airline RPKs (% vly)
16 14 12 10
5 4 3 2
8 6 4 2 0
1 0
1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999
-2 -4
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 demands in a recession
? Define YeD
Product
Luxury choc Whisky Digestive Biscuits Apples
YeD 2.4 4.1 0.6 0.2
? What is the formula?
? What type of YeD would
you expect a luxury good should have?
? Identify the different
types of YeD in the table…
Own brand baked beans
-0.4
Income elasticity of demands in a recession
? Estimate the effect a 5%
Product
Luxury choc Whisky Digestive Biscuits Apples
YeD 2.4 4.1 0.6 0.2
fall in income would have on each product.
? Estimate the effect a
15% increase in income would have on each product.
Own brand baked beans
-0.4
doc_437427036.pptx