Tutorial Week Meetings will take place during lunch & P4 tomorrow- check time for your meeting. Please bring your textbook to the lesson. You will be set an activity that you can work through in pairs during the lesson.

Income Elasticity of Demand Measures the responsiveness of demand following a change in income

Today’s lesson: Define, calculate and explain what is meant by income elasticity of demand Analyse what this tells us about a product Study a number of different products and their income elasticity

Starter When incomes increase what would happen to the demand for the following goods…can you explain why…? Can you use economics terms to explain why…? Income increases, what happens to the demand for: - Tesco Value Beans - Bus Tickets - Champagne

Demand will change when income changes, but by how much? normal goods For normal goods, as income increases, demand will increase. inferior goods. For some goods, as income increases, demand decreases. These are inferior goods. Why? Consumers choose alternative products which are perceived to be of higher quality. Examples???

Calculating Income Elasticity % Change in Quantity Demanded % Change in Income You must include the signs in your calculation, as this time, they will be of importance! E.g./ +10%-30% = = -2 +5%+15% Normal goods will give positive answers, Inferior goods will give negative answers.

Calculations – Work out the YED for the following products:- 1.QD ↑ By 10% Y ↑ By 3% 2.QD ↓ By 5% Y ↓ By 8% 3.QD ↑ By 25% Y ↓ By 45% 4. QD ↓ By 15% Y ↑ By 10%

Answers

Normal or Inferior? Normal Normal Inferior Inferior

Normal Goods basic goods luxuries Normal goods can be put into sub categories; we can distinguish between basic goods and luxuries Basic goods Basic goods will have an income elasticity between 0 and 1 Luxuries Luxuries will have an income elasticity of more than 1.

Answers to Calculations Q1 and Q2 – both ‘normal goods’ Luxury – Basic Good

‘Giffen Goods’ A Giffen Good is a special sort of inferior good. The consumption of some goods, such as bread and/or potatoes, goes up as their price increases. The argument is: these goods are staple foods for low income consumers, if their price increases, these people would have so little extra money to spend on meat or other luxury foods that they would abandon their demand for these and instead buy more bread/potatoes, and so the demand for these will increase. As such it has an upward sloping demand curve.

Other types of goods which may have upward sloping demand curves Giffen Goods Goods with ‘snob appeal’ Speculative goods Quality Goods In theory, there are a few reasons why products may have upward sloping demand curves, however, in reality, nearly all goods have been found to have downward sloping demand curves.

Quick Question Q1. The income elasticity for fruit juice in the UK in 2001 was estimated at (a) Explain what this estimate means (b) Discuss whether the relationship is one you would expect Q2. The income elasticity for tinned vegetables in 2001 was estimated at (a) Explain why tinned vegetables have a negative income elasticity of demand Q3. The income elasticity for Champagne was estimated to be 6.77 in 2001 (a) Discuss what this figure indicates about the product

Multi-Part Question The firms in a town centre include a funeral director, a beauty salon, a coal merchant and a bookseller. The table shows the income elasticities of demand for their products. (a) Decide whether each of the products is a normal, inferior or luxury good (b) For each of the products explain why you think it is this type of good. YED Funeral Services Beauty Salon treatments Coal Books