BOUNOMICS - 2.5.2 YED

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BOUNOMICS

<INCOME ELASTICITY OF DEMAND [YED]>

--SYLLABUS CONTENT--

--YED: DEFINITION--

INCOME ELASTICITY OF DEMAND (YED) Is a measure of the RESPONSIVENESS OF DEMAND TO A CHANGE IN INCOME and involves DEMAND CURVE SHIFTS.
It PROVIDES INFORMATION on the DIRECTION OF THE CHANGE, (POSITIVE or NEGATIVE) as well as the SIZE OF THE CHANGE (ELASTIC or UNELASTIC)

--YED: FORMULA--

--YED: QUICK CALCULATION--

PORTFOLIO CHECKPOINT

--Use the mark scheme below to construct the 2-mark answer--

YED: SIGNS & VALUES

--POSITIVE--

When the YED > 0 Income elasticity of demand is POSITIVE, meaning DEMAND and INCOME change in the SAME DIRECTION (i.e. both increase or both decrease). A positive YED indicates that the good in question is A NORMAL GOOD.

--NEGATIVE--

When the YED < 0 Income elasticity of demand is NEGATIVE, meaning DEMAND and INCOME change in OPPOSITE DIRECTIONS (i.e. when income increases, demand decreases, and vice versa). A negative YED indicates that the good in question is AN INFERIOR GOOD.

--POSITIVE < 1--

When the YED is POSITIVE and also LESS THAN ONE it has INCOME INELASTIC DEMND (a % increase in income produces a SMALLER % increase in Qd. NECESSITIES are income inelastic goods. E.g. Food, clothing and housing..

--POSITIVE > 1--

When the YED is POSITIVE and also GREATER THAN ONE it has INCOME ELASTIC DEMAND (a % increase in income produces a LARGER % increase in Qd. LUXURIES are income elastic goods. E.g. Foreign holidays, private education, sports cars...

--REMINDER: 𐤃INCOME--

"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...

--🌏REAL WORLD FOCUS🌏--

PORTFOLIO CHECKPOINT

--Use the mark scheme below to construct the 10-mark answer--

--🤔THINK AHEAD🤔--

Are there any brands that you used to consider

THE ENGEL CURVE [HL]

--DEFINITION--

ENGEL'S LAW is an economic relationship proposed by the statistician Ernst Engel in 1857. It suggests that as FAMILY INCOME INCREASES, the following is most often observed:
- - - - 1) As TOTAL EXPENDITURE on 'FOODSTUFFS' INCREASES, the % of TOTAL INCOME SPENT DECREASES.
        2) The TOTAL EXPENDITURE on 'HOUSING AND CLOTHING' INCRERASES, but stays PROPORTIONALLY THE SAME, as a % of TOTAL INCOME SPENT
        3) As TOTAL EXPENDITURE on 'EDUCATION AND HEALTHCARE' INCREASES, however, while the % of TOTAL INCOME SPENT INCREASES.
An 'ENGEL CURVE' is a graph that shows the relationship between DEMAND for a good (x-axis) and INCOME LEVEL (y-axis).
If the SLOPE of the curve is POSITIVE, (demand rises when income rises) the good is a NORMAL GOOD but if it is NEGATIVE, (demand falls when income rises) the good is an INFERIOR GOOD.
To sum up, it shows how INCOME LEVELS impact whether a good is considered a luxury, a necessity or an inferior good.

-ENGEL CURVE IN ACTION-

--🤔THINK AHEAD🤔--

"The economy is booming, and you have just inherited a long lease at a space in the local megamall. what type of product do you think would be a good idea to sell?" , "Why?"

"The economy is deep in recession, and you have just inherited a long lease at a space in the local megamall. what type of product do you think would be a good idea to sell?", "Why?"

IMPORTANCE TO PRODUCERS [HL]

--EXPANSION--

"If incomes are growing we definatly want to invest/produce products and services that are income elastic so we can make more revenue!"
During an EXPANSION of the economy, knowing the YED is important as when incomes rise. Ideally, a PRODUCER/INVESTOR will wish to INVEST in a market for an INCOME ELASTIC good or service as it will be expanding at a faster rate than income. E.g. Bubble tea in Singapore.

--RECESSION--

"If incomes are falling we definatly want to invest/produce products and services that are inferior goods so we can make more revenue!"
During a RECESSION, knowing the YED is important as when incomes fall. markets for NORMAL GOODS suffer a loss of sales. especially those for INCOME ELASTIC goods which suffer the most, followed by markets for INCOME INELASTIC goods. While in contrast markets for NEGATIVE INFERIOR GOODS can even experience increases in sales.

--🤔THINK AHEAD🤔--

"If I doubled your allowance, would you spend double or more on food?" or "Would you buy more 'stuff'?" If so, "What stuff would that be?"

YED & STRUCTURAL CHANGE [HL]

PRIMARY + <1

"When an economy grows, why does the PRIMARY sector grow slower than income growth?

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.

MANUFACTURING + >1

"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.

SERVICES + >1

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.

PORTFOLIO CHECKPOINT

--Use the mark scheme below to construct the 15-mark answers--

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