Income Elasticity Flashcards
what is income elasticity of demand
the responsiveness of demand to a change in income
what is the formula for income elasticity of demand
IED = percentage change in demand / percentage change income
how to interpret the income elasticity of neccesities
neccesities are basic goods that people need to buy such as electricity and water, these goods will be income elastic so no matter the income, the demand will be the same
how to interpret the income elasticity of luxury goods
demand for goods that people dont need but will buy if they can afford are income elastic, luxury goods such as spa memberships or luxury foods at restuarants will be income elastic as the demand will increase if income increases, low income families wont be able to afford it.
how to interpret the income elasticity of normal goods
normal goods the value of IED will be positive, so any IED above 0 will be normal goods
how to interpret the income elasticity of inferior goods
inferior goods are goods where if income rises, demand will fall, this means that the IED will be negative
what is discretionary expenditure
spending on goods that are not neccesities, non essential spending so spending which is not automatic, ie spending on luxuries
how can businesses use income elasticity to their advantage
Businesses can use IED to plan ahead, if income is said to increase, manufacturers may switch production from normal goods to luxury, like plastic bottles , to plastic toys, if one product is income elastic, then if there is a recession incoming, then they can cut output, some companies can also boosts the production of inferior goods in a recession
how can government use price elasticity to their advantage, point 1
by using excise duty and VATs, governments impose taxes to increase revenue, therefore they avoid income elastic products as they will know consumers will avoid heavily taxed products as the demand changes heavily with price, therefore goverments will tax inelastic products such as necessites or products with few subsitutes, such as cigerettes, petrol, and alchohold
how can government use price elasticity to their advantage, point 1
subsidies, when granting subsidies, governments look at the price elasticity, the piint of subsidies is to boost supply, so goverments will pick an inelastic, as elastic products, the supply boost wil opnly change the price a litle
too lazy to make fc read up on the price part in income elasticity in the textbook
too lazy to make fc read up on the price part in income elasticity in the textbook
what is exise duty
when governments tax certain goods such as cigerrets and alchohol
