"Now imagine your income increased by 20%, giving you an extra $2000 per week. Your budgetook at your usual shopping list of food items below and decide whether you would buy up to 3 more, up to 3 less, or the same amount of each item per month. Write the list and record your decisions."

Remember to ask yourself: "Do you have enough already?", "Do you really want more?", and "Do you want to replace some/all with something else?"

"Go to 'menti.com' and use the code 52626643 below to join, then input the changes you made."

• "Great!!! I now have more money in my pocket, and prices have stayed the same, so I'm buying more!"

• When households have HIGHER INCOMES, assuming stable prices, their PURCHASING POWER INCREASES (in other words their REAL INCOME RISES), which means they are more likely to DEMAND MORE and vice versa. Those goods which are demanded more are called 'NORMAL GOODS'.

--INCOME RISES  => INCREASE IN DEMAND => 'NORMAL GOOD'--

--INCOME FALLS => DECREASE IN DEMAND => 'NORMAL GOOD'--

E.G LUXURY GOODS, TECHNOLOGY, TRAVEL, PRIVATE EDUCATION...

When households have HIGHER INCOMES, assuming stable prices, their PURCHASING POWER increases, which means they are more likely to DEMAND MORE and vice versa. Those goods which are demanded LESS of are called 'INFERIOR GOODS'.

INCOME RISES  => DECREASE IN DEMAND => 'INFERIOR GOOD'

INCOME FALLS => INCREASE IN DEMAND => 'INFERIOR GOOD'

E.G NECESSITY GOODS, RICE, DOMESTIC FLIGHTS...

"Once upon a simpler time (2002), a rather handsome economics teacher took his talents to a city off the south coast of China, called Haikou, in Hainan. At that time recent development of the economy had seen incomes start to rise, and the locals responded by spending more and more on what they perceived as a very luxurious product, clearly with an income elastic demand, namely 'KFC.' Before long, the mighty McDonald's also opened its first branch—and the rest is history." 

Question: "Do you think these restaurants still command the same level of YED today?", "Why/Why not?", "What's likely to have changed over time?"

• Low-Income (Agricultural) Stage: A poor country has a low average income. Since people must eat to survive, a very large portion of the nation's total economic effort (its labor and capital) is dedicated to producing food. This is why the agricultural sector is the largest employer and contributor to GDP in the earliest stages of development. Industrialization & Manufacturing Stage: As the economy grows and average incomes rise (often starting with agricultural surpluses), the demand for food does not keep pace. According to Engel's Law, the demand for manufactured goods (like clothing, appliances, cars, and housing) and basic services grows much faster. Capital and labor are pulled into these more profitable, faster-growing sectors. This is the industrial revolution phase.

Service-Based Economy Stage: As incomes rise even further, the demand for services like healthcare, education, finance, tourism, and technology explodes. The share of manufacturing in employment often peaks and then declines (a phenomenon related to Baumol's Cost Disease), and the service sector becomes the dominant employer and GDP contributor.

This transition is visually represented by the Clark-Fisher model, which directly applies Engel's Law to show the shift in labor force from:

1) TOTAL $-SPENDING on 'FOODSTUFFS' INCREASES, however it takes up a smaller % of TOTAL INCOME. For example, when you earn $1,000 a month, you might spend $400 on food. That's 40% of your income. When you earn $5,000 a month, you spend $800 on food (fancier groceries, restaurants). That's only 16% of your income. In a Nutshell: Food is a basic need. You cover the basics first, and any extra income goes to other things.

Agriculture is the main part of the primary sector, and if you remember from the PED section, food is considered a NECESSITY, and most households already make sure they have close to sufficient amounts; hence, when incomes rise, the increase in demand tends to be relatively smaller and can therefore be considered INCOME INELASTIC. 

"When an economy grows, why does the MANUFACTURING sector grow faster than income growth? 

• MANUFACTURED products (especially high-value items such as cars, televisions, computers, and so on) often have a YED that is greater than one (INCOME ELASTIC), as people desire new goods that they have never been able to afford before so that as society’s income grows, the demand for these products grows faster than income.

"When an economy grows why does the TERTIARY sector GROW FASTER than INCOME?"

Many services have even higher YEDs than manufactured goods, so the percentage increase in the demand for these is much larger.