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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 eBa

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Income Elasticity of Demand

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    1. Income Elasticity of Demand

    2. 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 Ł269 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.

    3. 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);

    4. 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

    5. There are 3 different types of Income Elastic Goods

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

    7. Look out for the sign…! A positive sign (+) denotes a normal good A negative sign (-) denotes an inferior good

    8. The details you need to know Normal goods have a positive income elasticity of demand As consumers’ income rises, so more is demanded at each price level Normal goods have an income elasticity of demand of between 0 and +1 Luxuries have an income elasticity of demand > +1 So 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

    9. The detailed knowledge

    10. + 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?

    11. Positive Income Elastic Demand Diagram Note the axes are DIFFERENT!

    12. Elastic or Inelastic + YeD Elastic goods – are seen as LUXURIES OR SUPERIOR! Inelastic goods – are seen as NORMAL or NECESSITIES.

    13. - Negative Income Elasticity An increase 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

    14. 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?

    15. Negative Income Elasticity Diagram = Inferior Note the different axes labels

    16. 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!

    17. So to summarise

    18. Look for the signs! LUXURY GOODS

    19. 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%

    20. 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…

    21. You decide…. Bus travel Cigarettes Designer clothes Fine wines Fresh vegetables Frozen vegetables Fruit juice Instant coffee International air travel Luxury chocolates Margarine Stilton Private education Private health care Stringy cheese Rail travel Shampoo Tinned meat Value “own-brand” bread

    23. A Diagram for you…

    28. Income Per Capita and Airline Travel by Country

    32. Practice time…. This is NOT exam practice! The exam paper will NOT look like this!

    33. Income elasticity of demands in a recession Define YeD 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…

    34. Income elasticity of demands in a recession Estimate the effect a 5% fall in income would have on each product. Estimate the effect a 15% increase in income would have on each product.

    35. Homework RED sheet Complete Questions

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