YED Income Elasticity of Demand 2015 AQA Economics PDF

YED Income elasticity of demand SML 2015 AQA Economics 1. What is income? Starter questions 2. What is inflation? 3. Why is it important that income/wages at least keep up with inflation? 4. If income/wages increase at a faster rate than inflation how mig...

YED Income elasticity of demand SML 2015 AQA Economics 1. What is income? Starter questions 2. What is inflation? 3. Why is it important that income/wages at least keep up with inflation? 4. If income/wages increase at a faster rate than inflation how might that change buying behaviour? 5. If income/wages fail to keep up with inflation how might buying behaviour be affected? Wages https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/earn ingsandworkinghours/timeseries/kab9/emp Inflation https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/l55 o/mm23 Income levels With a partner discuss the impact on the demand for all goods as incomes in the UK rise  YED (Income elasticity of demand) Income elasticity of demand (YED) shows the effect of a change in income on quantity demanded. Income is an important determinant of consumer demand, and YED shows precisely the extent to which changes in income lead to changes in demand. YED = % change in quantity demanded % change in income Normal goods have a positive YED Inferior goods have a negative YED Income inelastic 1  YED Income elasticity http://beta.tutor2u.net/economics/reference/income-elasticity-of-demand Normal Goods Luxury goods and services have an income elasticity of demand > +1 i.e. Normal goods have a positive income demand rises more than proportionate to a change in income – for example, an 8% elasticity of demand so as consumers' increase in income might lead to a 10% income rises more is demanded at rise in the demand for new kitchens. each price i.e. there is an outward shift Inferior goods have a negative income of the demand curve elasticity of demand meaning that demand falls as income rises. Typically, Normal necessities have an income inferior goods or services exist where superior goods are available if the elasticity of demand of between 0 and consumer has the money to be able to +1 for example, if income increases by buy it. Examples include the demand for 10% and the demand for fresh fruit cigarettes, low-priced own label foods in supermarkets and the demand for increases by 4% then the income council-owned properties elasticity is +0.4. Demand is rising less If income falls these inferior goods may than proportionately to income. see an increase in demand YED http://beta.tutor2u.net/economics/reference/income-elasticity-of-demand Normal Goods Normal goods have a positive income elasticity of demand so as consumers' income rises more is demanded at each price i.e. there is an outward shift of the demand curve Normal necessities have an income elasticity of demand of between 0 and +1 for example, if income increases by 10% and the demand for fresh fruit increases by 4% then the income elasticity is +0.4. Demand is rising less than proportionately to income. Continued…. Luxury goods and services have an income elasticity of demand > +1 i.e. demand rises more than proportionate to a change in income – for example a 8% increase in income might lead to a 10% rise in the demand for new kitchens. Inferior goods have a negative income elasticity of demand meaning that demand falls as income rises. Typically, inferior goods or services exist where superior goods are available if the consumer has the money to be able to buy it. Examples include the demand for cigarettes, low-priced own label foods in supermarkets and the demand for council-owned properties If income falls these inferior goods may see an increase in demand YED examples http://study.com/academy/lesson/normal-good-in-economics-definition- examples.html first 2 minutes or so…. Luxury and Inferior Goods Y E D d i a g r a m s  YED Tasks 1. Make a list of three products or more that you think should have a positive income elasticity of demand 2. Draw and correctly label a demand curve demonstrating positive income elasticity of demand for a normal good 3. Make a list of three products or more that you think should have a negative income elasticity of demand 4. Draw and correctly label a demand curve demonstrating negative income elasticity of demand for an inferior good 5. Draw a demand curve demonstrating YED for Cheese with a YED of 0.53 6. Draw a demand curve for Wine with a YED of 2.60 Income inelastic 1 Task Prior to an increase in income, a person bought 200 units of a product per year with an income of £15000. After an increase in income of £1,500, this person bought 240 units of the product. Calculate the income elasticity of demand and say what it means. Possible question - draw the demand curve Recent research for an inclusive tour operator produced the following estimates for the income elasticity of demand to selected holiday destinations Majorca -0.15 Croatia 1.10 Florida 1.30 South Africa 2.05 Explain what each means Answer Prior to an increase in income, a person bought 200 units of a product per year with an income of £15000. After an increase in income of £1,500, this person bought 240 units of the product. Calculate the income elasticity of demand and say what it means. The income elasticity of demand is 2. This is calculated as 20%/10%. This means that for any given change in income, there will be twice as great an increase in demand. This is indicative of a luxury good (as the answer is 2 not a necessity, not normal but more a luxury). Answer: Holiday destinations The estimate for Majorca indicates that, as household income increases, the demand for holidays to this part of Spain is likely to fall. Majorca could now be seen as an inferior good. For all other destinations shown, an increase in income will lead to an increase in the quantity of holidays demanded. These are seen as normal goods. The extent of the increase will be greatest for holidays to South Africa. Considered more of a luxury exotic holiday than the other destinations? The information could be used by tour operators when planning future destination opportunities or if they plan to withdraw from a particular destination. http://filestore.aqa.org.uk/resources/economics/AQA-71351-SIN.PDF Extract B: The rising cost of food In recent years, food prices have risen faster than incomes, making it harder for many low-income families to buy food which forms a significant part of their total weekly spend. On average, 11.3% of household income was spent on food in 2011, up from 10.5% in 2007. However, for the poorest 20% of households, their spending on food rose from 15.2% to 16.6% in the same period. Record numbers of people are using ‘food banks’, where charities provide emergency food to those struggling to feed themselves and their families. Extract B (line 2) states that spending on food by low-income families ‘forms a significant part of their total weekly spend.’ Calculate the income elasticity of demand for food if an increase in income from £25 000 to £30 000 leads to an increase in the quantity demanded of food of 10%. [4 marks] XED Cross elasticity of demand XED Cross elasticity Definition Formula Substitutes have a positive XED Complements have a negative XED a result of 0 means there is no relationship Calculate the cross elasticity of demand in each of the cases below and say what the estimate means Original price of lamb per kilo £3.00 quantity demanded of beef 200 kilos (000s) New price of lamb £3.75 per kilo quantity demanded of beef 300 kilos (000s) Original price of petrol per litre £1.00 quantity demanded of cars 200 (000s) New price of petrol £1.05 quantity demanded of cars 198 (000s) Figure 2.16 page 47 get the class to explain