Some good revision videos for XED and YED

YED and XED Quiz!

If the video doesn't work click this link HERE for the website!

Income Elasticity of Demand

Here is an excellent revision note on YED from tutor2u.

Income elasticity of demand measures the relationship between a change in quantity demanded for good X and a change in real income. The formula for calculating income elasticity is:

% change in demand divided by the % change in income

(a) Normal Goods
Normal goods have a positive income elasticity of demand so as consumers’ income rises more is demanded at each price i.e. there is an outward shift of the demand curve
1. Normal necessities have an income elasticity of demand of between 0 and +1 for example, if income increases by 10% and the demand for fresh fruit increases by 4% then the income elasticity is +0.4. Demand is rising less than proportionately to income.
2. Luxury goods and services have an income elasticity of demand > +1 i.e. demand rises more than proportionate to a change in income – for example a 8% increase in income might lead to a 10% rise in the demand for new kitchens. The income elasticity of demand in this example is +1.25.

(b) Inferior Goods
Inferior goods have a negative income elasticity of demand meaning that demand falls as income rises. Typically inferior goods or services exist where superior goods are available if the consumer has the money to be able to buy it. Examples include the demand for cigarettes, low-priced own label foods in supermarkets and the demand for council-owned properties.


The income elasticity of demand is likely to be strongly positive for

• Fine wines and spirits, high quality chocolates and luxury holidays overseas.
• Sports cars
• Consumer durables - audio visual equipment, smart-phones
• Sports and leisure facilities (including gym membership and exclusive sports clubs).

In contrast, income elasticity of demand is likely to lower and possibly negative for

• Staple food products such as bread, vegetables and frozen foods.
• Mass transport (bus and rail).
• Beer and takeaway pizza!
• Income elasticity of demand is negative (inferior) for cigarettes and urban bus services.

Product ranges and longer term trends

Income elasticity of demand will vary within a product range. For example the Yed for own-label foods in supermarkets is less for the high-value “finest” food ranges.
There is a general downward trend in the income elasticity of demand for many basic products, particularly foodstuffs. One reason is that as a society becomes richer, there are changes in tastes and preferences. What might have been considered a luxury good several years ago might now be regarded as a necessity? How many of you regard a Sky sports subscription or an iPhone5, an iPad3 or a new Blackberry as a necessity?

How do businesses make use of estimates of income elasticity of demand?
Knowledge of income elasticity of demand helps firms predict the effect of an economic cycle on sales. Luxury products with high income elasticity see greater sales volatility over the business cycle than necessities where demand from consumers is less sensitive to changes in the cycle.

Income elasticity and the pattern of consumer demand

As we become better off, we can afford to increase our spending on different goods and services. The income elasticity of demand will also affect the pattern of demand over time.

* For normal luxury goods - income elasticity of demand exceeds +1, so as incomes rise, the proportion of a consumer’s income spent on that product will go up.
* For normal necessities (income elasticity of demand is positive but less than 1) and for inferior goods (where the income elasticity of demand is negative) – then as income rises, the share or proportion of their budget on these products will fall
* For inferior goods as income rise, demand will decline and so too will the share of income spent on inferior products.

Elasticity Notes

There are lots of websites with useful revision notes for Elasticity. Have a look at these links and make some notes in your classwork books.

PED
PES
YED
XED

Income Elasticity of Demand

Income Elasticity of Demand from sarameeajan

Cross Price Elasticity

Cross price elasticity of demand from sarameeajan

Oil Questions

Question 1

Apart from price, identify two factors which might affect the demand for oil (4)

Question 2

Using a demand and supply diagram explain why oil reached a price of $78.40 a barrel (6)

Question 3

Is demand for oil price elastic or inelastic, explain your answer (6)

Question 4

Explain what might happen to the revenue of an oil producer with increased demand and increased price (4)

Question 5

To what extent is the supply of oil elastic (12)

Elasticity along a demand curve

Today we looked at elasticity and different shaped demand curves. It is important to remember that the elasticity changes along a demand curve. It is easier to explain why using calcuations. This graph here taken from the s-cool economics website is really good at expalining why.



Add caption


To make the maths easy, I've drawn a curve that is 45 degrees to the horizontal. Where the demand curve hits the y-axis, the price is 20, and where the demand curve hits the x-axis, the quantity demanded is 20.

Now look at the change going on at point A. The price fell from 19 to 18 (a 5% fall, approximately) causing the demand to rise from 1 to 2 (a 100% increase). This gives an elasticity of (-)20 which is very elastic.
At point B, the price fall from 10 to 9 represents a 10% fall, and the resulting rise in the quantity demanded from 10 to 11 represents a 10% rise. The elasticity, therefore, is unitary.

At point C, the price fell from 2 to 1 (a 50% fall) causing a rise in demand from 18 to 19 (a 6% rise, approximately). This gives an elasticity of (-)0.12, which is very inelastic.
So, every part of the demand curve above (or to the left) of point B will be elastic, and every point below (or to the right) of point B will be inelastic. Straight-line downward sloping demand curves are most elastic at the top. The elasticity then continually falls as one moves down the curve, reaching unitary elasticity somewhere in the middle. Past this point, the curve becomes inelastic, reaching a value of zero when the curve hits the x-axis.

Wheat Prices

 The price of wheat has risen dramatically over the past two years as shown in the graph.

In the exam you will need to be able to explain the causes, effects and solutions of this rise in price… Remember changes in price don't just happen, they are a result of demand and supply side issues. Growing populations and extreme weather conditions have all played their part. Read this article here to find out about the causes of rising food prices.

Impact of rising food prices

Examiners like to ask you about the impacts of rising prices.
These videos here will give you some ideas.

Video 1

Video 2

Video 3

Tasks:

1. Draw a demand and supply diagram explaining why the price of wheat has increased
(6 marks)

2. Evaluate the impact of rising wheat prices on the following groups (14 marks)

Think about the effect on different groups - farmers, manufacturers who use wheat, consumers. 

Demanding issues..

Last lesson we looked at the demand curve, contractions and extensions in demand and the factors that shift demand.

Remeber changes in price affect the willingness to demand and therfore we see movements along the demand curve but all other factors shift the demand curve.

A good way to remember is:

P opulation
A dvertising
S ubstitues
I ncome 
F ashion
I nterest rates
C omplemets

Have a look HERE for some revision notes and take a look at the video below:

 

Types of Economy

Here are some links to help you with your research:

Link 1

Link 2

For Monday's lesson you need a handout summarising the differences between the different economies and a Powerpoint with information about your country!



Positive or Normative?

This is an introductory blog note for new students of AS microeconomics. It focuses on positive and normative economics.

Positive Statements

A positive statement is a statement about what is and contains no indication of approval or disapproval. A positive statement can be wrong; it can be tested by objective use of evidence. The tools of positive economics are reason, logic and empiricism.

Normative Statements

A normative statement expresses a value judgment about whether a situation is desirable or undesirable.

"The British economy would be a lot stronger if Mr Hunt was Governor of the Bank of England"

is a normative statement because it expresses a judgment about what ought to be. Statements that include indicator words such as: should, ought, or prefer are likely to be normative rather than positive Decide whether the following statements are positive or normative:

Statement


Positive or Normative?

1 The government can reduce obesity by offering a subsidy to low income families when they buy fresh vegetables in the supermarket

2 Luxuries should be taxed more heavily than necessities

3 A rise in the value of the exchange rate will reduce the number of overseas tourists visiting London

4 The Minimum Wage needs to be replaced with a Living Wage of £8 per hour

5 Taxpayers should not have to pay for bail outs to a failing Greek economy

6 Drought in the United States should lead to a rise in the world price of grain

7 Reducing the top rate of income tax to 45% will increase relative poverty in Britain

8 It is right that the European Union has introduced a system of carbon trading as a way of cutting CO2 emissions

9 A reduction in the standard rate of VAT ought to bring about a recovery in consumer spending on many goods and services

10 A rise in the price of petrol will lead to an increase in the demand for rail transport

11 An increase in the rate of inflation will lead inevitably to an increase in unemployment

12 Unemployment is more harmful than inflation

13 The Government might target unemployment rather than inflation in order to achieve an improvement in economic growth

14 As a general rule, people are happier in more equal societies

15 Despite a large increase in income per head, people are no happier today than they were 50 years ago

16 The promotion of happiness is a more important goal than the maximisation of production

PPF Curves

Here are links to some revision notes which may be useful. This link HERE is about PPF curves and opportunity cost and this link HERE is about shifting the PPF curve.