Income elasticity of demand

Income elasticity of demand.  Income elasticity of demand measures the responsiveness of quantity demanded following a change in real income.

Income elasticity of demand.  What is real income?

Real income.  Income measured in constant prices. This is found by taking money income and deflating it by a suitable price index.

Does this make sense? In 1950, the average annual wage in Britain was £101. Today, it is £25,428.

Does this make sense? Therefore, people in 2010 are 252 times richer than in 1950.

252 times richer? But prices went up too. If you consider the increase in prices, people are probably only about 5 times richer than in Not bad, but not as impressive as 252 times richer.

Nominal income. This is income measured in money terms without any price deflator.

Income elasticity of demand.  Sandra has seen her real income fall by 14%. As a result, she now eats at her favourite restaurant, ‘The Nosebag’, 3 times a month instead of four. Calculate the YED for the Nosebag restaurant.

Income elasticity of demand.  British incomes increased in real terms by 34% between 1991 and Yet visits to Great Yarmouth Pleasure Beach fell from 2.5 million in 1991 to 1.4 million in Calculate the YED for Great Yarmouth Pleasure Beach.

Income elasticity of demand. Normal LuxuryNormal necessityInferior good Int’l air travelFresh vegFrozen Veg Fine winesInstant coffeeCigarettes Luxury chocolatesNatural cheeseProcessed cheese Private educationFruit juiceMargarine Designed clothesUtilitiesTinned meat Antique furnitureShampoo and toothpaste Own brand products.

A normal good  A normal good: there is a positive relationship between income and demand.  Or  A good for which demand will rise if incomes rise, and fall if incomes fall.

A luxury good.  A type of normal good for which demand will disproportionately rise if income rises and disproportionately fall if income falls. .

 In 2009, the German manufacturer BMW sold 90,563 cars in China.  Yet in the first six months of 2010, 121,614 BMWs were bought in China, putting the company on course to sell more cars there than in the US for the first time.

An inferior good  There is a negative relationship between income and quantity demanded.  Or  A good for which demand will fall if income rises and rise if income falls.

Income elasticity of demand.  Due to the global economic crisis average incomes in Singapore fell by 7 percent between November 2008 and November The number of visits to the cinema rose from 1.3 million in November 2008 to 1.5 million in November Calculate the YED for cinema visits in Singapore.

Income elasticity of demand.  Calculate the YED for cinema visits in Singapore.  Assess your answer.

Chocolate

Chocolate As the UK's National Chocolate Week commences ( October), latest research from Mintel reveals that despite cutbacks in other areas, chocolate sales are staying sweet - with UK sales of chocolate confectionery increasing by 9.2% between 2007 and 2009 to reach an estimated £3.6 billion and sales projected to grow even further to £4.1 billion by This is despite a fall in real incomes of between 3 and 5%.

Chocolate "Chocolate rode out the recession, with consumers turning to it as a low cost comfort food. And the good news for National Chocolate Week is that the chocolate confectionery market is continuing to see growth, as UK consumers remain a nation of chocolate lovers.

Chocolate question Using the information provided, and your own knowledge, discuss whether chocolate is an inferior good. (January 2011 Unit 1 exam). (10)

Chocolate

Income elasticity of demand.