Income Elasticity of Demand

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Income Elasticity of Demand

• other elasticity issues!

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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

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Recap of PeD issues
Quick quiz using whiteboards

• How do you calculate PeD. Whats the formula?
• Answer
• change in D
• change in Price

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What does these figures mean?

• Choose either Elastic or Inelastic
• -3.5
• -0.9
• 0
• -1.1
• -0.2

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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!

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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?

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Sadly these statistics really do exist!
So what does these PeDs mean?

• Beer-0.76
• Wine-1.69
• Spirits-0.86
• Cigarettes-0.77
• Leisure air use-1.3

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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 consumers 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

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Income elasticity

• The other formula needed!

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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

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Income Elasticity of Demand

• Normal Good demand rises as income rises and
  vice versa
• Inferior Good demand falls as income rises and
  vice versa

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Look out for the sign!

• A positive sign denotes a normal good
• A negative sign denotes an inferior good

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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 gt 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

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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

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So whats 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

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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

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So which would have a value BETWEEN 0 AND 1?
i.e. a NORMAL good?
So which would have a value GREATER THAN 1?
i.e. a LUXURY good?
So which would have a value? i.e. a inferior
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

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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!

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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!

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Now do some calculations.!
Use worksheet
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The answers...
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So try this. Identify the other 3 Ps for these
products
Price state whether the product is PeD elastic
or inelastic Promotion how would you suggest
promoting it.consider its YeD Place how would
you distribute your product. What type of
outlet? Again consider its Ped Yed!

• Bus travel
• Cigarettes
• Fine wines
• Frozen vegetables
• Fresh Fruit juice
• Instant coffee

• International air travel
• Luxury chocolates
• Processed cheese
• Rail travel
• Shampoo

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Homework for Friday

• P61 62 and make notes on Techniques used to
  estimate PeD
• Read Issues for Analysis Evaluation
• P63 DO Revision Q 1ab, Q3a 6!