AS Business Unit 2 Income Elasticity (YED)

Lesson Objectives To be able to be able to discuss the effect on business of income changes To be able to discuss the implications for products and marketing of changes in incomes To be able to calculated the YED value To be able to answer past paper questions based on the topic

You will need a calculator for this lesson

Starter If your income went up - imagine you had a part time job and suddenly it was paying £30 an hour. Would you change your spending habits? Would you shop in different shops? Demand different products?

Income elasticity of demand – called YED Like PED we can calculate this to see what kind of goods they are...

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

What do the results mean – look for the signs More than +1 = luxury (+2, +3.5) +0 to +1 = Normal (0.5, 1,) Minus figures = inferior (-0.1, -2)

Types of goods In a recession consumers will change their buying habits (a pattern of demand changes as income changes) if I gave you £500 now you would buy different things than if I gave you £5 There are; –Normal goods – as income increases so does demand –Inferior goods – as income increases demand decreases e.g. Bread, as incomes rise consumers switch to more expensive food. Margarine as incomes rise consumers switch to butter. Bus transport – as incomes rise consumers switch to their own car –Luxury goods – as income rises consumers may substitute items for these types of goods. In times of recession consumer demand drops

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

Normal – your income is normal for your lifestyle

Luxury – your income goes up

Inferior – your income goes down

Other types of goods to help you answer more questions Complementary Demand for one type of good will affect demand for another, purchase is somehow linked, petrol and cars

Substitute The impact of a change in price will cause consumers to switch products to an alternative good

Sample question 1 A 10% increase in income will result in a 2.3% increase in demand for coffee. Calculate the YED.

Answer question 1 D/I +2.3/10 =0.23 = normal good

Sample question 2 Which of the following is most likely to increase the demand for DVD players? A A fall in incomes B A fall in the price of a substitute good C A fall in the price of a complementary good D A fall in the population size

Answer - A fall in the price of a complementary good (C) - Complementary goods are ones that are somehow linked (1 mark) - Purchasing one will lead to the purchase of its complement (1 mark). - If DVDs fall in price more will be bought thus increasing the demand for the complementary good (DVD players) (1 mark). - The opposite will happen with substitute goods (1 mark). - The other choices will also result in reduced demand (1 mark if explained fully).

Sample question 3 If an increase in a consumer’s income causes the consumer to decrease the quantity demanded of baked beans, then baked beans might best be described as A a complementary good. B an inferior good. C a normal good. D a substitute good.

Answer question 3 Answer is option B Inferior good Inferior goods have a negative YED i.e. demand falls as income rises (1 mark). Sales of inferior goods such as baked beans are likely to decrease when incomes rise as consumers change to ‘better’ or more attractive alternatives (1 mark) e.g. organic vegetables (1 mark). A complementary good is one which is linked with the purchase of another good (1 mark) e.g. DVD and DVD players and baked beans are not linked to any other product (1 mark). A substitute good is an alternative to a product (1 mark). A normal good is a good for which demand increases as incomes rise (1 mark) therefore baked beans cannot be classed as a normal good if the quantity demanded decreases as incomes rise (1 mark) 4 marks

Revision Video