Would you expect the income elasticity for potatoes and DVDs to be large or small? If the supply of oil is price inelastic in the short term, what would you expect the impact of an outwards shift in the demand for oil to be? What might happen in such a situation in the long term? In economics we usually perform a partial equilibrium analysis. Thus, while assuming that all other markets remain constant, we observe only one. We can then observe the changes in supply, prices and demand within this market. However, this is just an indication of the general features of the current trends. It does not define the exact percentage of an increase or decrease in demand. To overcome these shortcomings, economists are now using the tool of elasticity of demand, as it measures the percentage by which demand will alter if there is a change in price, income or supply. Thus there are three types of elasticity. In this document, we will concentrate on the income elasticity of demand as it is the parameter that is consulted when choosing what to produce. At the outset, it is important to define and explain the income elasticity of demand with examples, along with its definition, its formula and the reasons for its relevance. We will then study the specific cases of the demand for potatoes and DVDs, which are two radically different types of goods. To conclude, we will analyze the demand for oil when the supply of oil is price inelastic in the short term, and then study the effects in the long term.
[...] To solve this problem they decide to increase the production in goods that have high income elasticity of demand (and thus correspond to the new buying criteria of consumers who want more quality and more luxury) so as to in crease the sales. It is for instance the “blue parrot” patent of Sainsbury's (organic and healthy food aimed at children) or its “taste the difference” (normal goods but of much higher quality, of “luxury” standard). The income elasticity also shows the level of development of a country as it shows which goods firms ought to produce if they want to make profit, which means if they want consumers to buy them. [...]
[...] Thus we can say that we expect the potatoes elasticity to be low, less than zero at least, and the dvds elasticity to be high, more than 1 as a luxury good. III.] The example of oil As explained by Paul Turner in his article “the forces of energy” (the economist review, November 1998) the demand for petrol, that is oil, is closer to 1 (whith UK past features) which means that the share of income spend on petrol does not fall as income fall. [...]
[...] Strictly speaking it is by how much quantity demanded will change as income change. There three possibilities: The elasticity is negative; it is an inferior good which means that as the income rises the demand for this type of good decreases. It is usually low-quality goods which use can be a mark of poverty, especially at the countries-scale: if firms should product inferior goods to make profit th country is a developing one. The elasticity is positive but less than one: it is a normal/basic good. [...]
[...] Define and explain the concept of an income elasticity of demand for a good Define and explain the concept of an income elasticity of demand for a good. Would you expect the income elasticities for potatoes and DVDs to be large or small ? If the supply of oil is price inelastic in the short term, what would you expect to be the impact of an outwards shift in the demand for oil? What might happen in the long term? [...]
[...] To confirm this let us have a look at the substitution and income effect of a price change for potatoes: assuming there are only two goods for a person to buy: dvds and potatoes, we draw the budget constraint line and the indifference curve. If there is a decrease in the price of potatoes what is happening? First the relative price is changing (green dotted line) this is the substitution effect to for the same amount of money you can have more of potatoes than of dvds. [...]
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