Income Elasticity of Demand

1. Income Elasticity of Demand & other elasticity issues!

2. Aims: Students to understanding the concept of PeD & YeD To have written and numerate understanding of elasticity figures (elastic & inelastic) implications for revenue and profit (and therefore decision-making); To be able to identify the factors that determine it, the difficulties of calculating and using elasticity

3. Recap of PeD issues How do you calculate PeD�. What�s the formula? Answer� = % change in D % change in Price

4. What does these figures mean? Choose either Elastic or Inelastic -3.5 -0.9 0 -1.1 -0.2

5. Why does PeD always use a � figure? Because there is always an INVERSE relationship! A rise in price will usually always result in a fall in Demand. A fall in price will usually always result in a rise in Demand!

6. So what factors do you think will cause some products to be elastic while others are inelastic? First thinks about the type of PeD the following products would have�. ? Either elastic or inelastic Beer Contract mobile phone Petrol Cigarettes Leisure flights Red bull?

7. Sadly these statistics really do exist! Beer-0.76 Wine-1.69 Spirits-0.86 Cigarettes-0.77 Leisure air use-1.3

8. Factors that influence Elasticity The number of close substitutes for a good / uniqueness of the product The degree of necessity of consumption or whether the good is a luxury The % of a consumer�s income allocated to spending on the good The time period allowed following a price change Whether the good is subject to habitual consumption Peak and Off Peak Demand

9. Income elasticity The other formula needed!

10. 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

11. Income Elasticity of Demand: Normal Good � demand rises as income rises and vice versa Inferior Good � demand falls as income rises and vice versa

12. Look out for the sign�! A positive sign denotes a normal good A negative sign denotes an inferior good

13. The details you need to know Normal goods have a positive income elasticity of demand so as consumers� income rises, so more is demanded at each price level Necessities have an income elasticity of demand of between 0 and +1 Luxuries have an income elasticity of demand > +1 i.e. the demand rises more than proportionate to a change in income Inferior goods have a negative income elasticity of demand. Demand falls as income rises

14. 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% Yed = - 2.1: Good is an inferior good and elastic a rise in incomes of 10% would lead to a fall in demand of 21%

15. So what�s a Necessity, a Luxury and an Inferior good? You will each be �given� a good and you have to decide whether it is a necessity, luxury or an inferior good�

16. You decide�. 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

18. The business relevance�. If your business sells a inferior good�. You will have a good idea who to target your advertising at! You should also have a good idea of the type of promotional techniques to use!

19. The business relevance�. If your business sells a luxury good�. You will have a good idea who to target your advertising at! You should also have a good idea of the type of promotional techniques to use!

20. Now do some calculations�.!

21. The answers...

22. So try this�. Identify the other 3 P�s for these products� Bus travel Cigarettes Fine wines Frozen vegetables Fresh Fruit juice Instant coffee International air travel Luxury chocolates Processed cheese Rail travel Shampoo

23. Homework� for Friday P61& 62 and make notes on� Techniques used to estimate PeD Read Issues for Analysis & Evaluation P63 � DO Revision Q 1a&b, Q3a & 6!