Trends in Income and Price Elasticity of Transport †Free Samples

Questions: 1. Define and explain the three key economic ideas: 2. Using the economics or other literature to identify estimates of the income elasticity of demand for at least three different products. Answers: Define and explain the three key economic ideas: People are rational: Rationality plays an important role in the field of economics. It is a common to assume that people are rational in behaviour. They choose a bundle of goods, from the given alternatives, which gives them highest level of satisfaction. The resources are taken to be constant and the decision is made according to the priorities and preferences(Mathis Steffen, 2012). Consumer, producers and society try to maximise their level of satisfaction, profits and welfare respectively. They all work at margin. A consumer tries to consume a commodity till the point his satisfaction from additional unit turns to zero, given his level of income and prevailing prices(Krstic Krstic, 2015). Producer produces till the point where his gains from additional unit turn to zero. For example, if George produces belts, he will produce till the point where his profits (revenue- cost) turn to zero with given resources and technology. There is no incentive for him to produce further as the c osts will be higher than the revenue. People respond to incentives: Incentive motivates consumers, producers and society to increase their consumption, production and welfare respectively. A rational person compares his costs to his gains. Positive incentives increase the gains of each while the negative ones forbid further consumption or production(Cardinaels Jia, 2010). Fall in prices is a positive incentive for consumers to increase their consumption while the same phenomenon is negative for the producers and vice versa. They then decrease their production until the increase in demand (because of lower price) pushes the prices back to the initial value. Decline in prices both increases the demand and decrease the production. Producers decrease the output because their profits are reduced(MatthewMcCaffrey, 2014). For example, if the price of apples falls, Serena increases her consumption of apples with her given level of income. The reduced prices acts as in incentive and persuades Serena to increase her satisfaction with increased consumption. Optimal decisions are made at the margin: A rational person makes a decision based on a given number of alternatives. He trade-offs the ones associated with lesser satisfaction for the better ones, as per his preferences. These decisions are made with respect to the existing circumstances. It is about increase or decrease in the current consumption or production. Decisions are never about all or none. Optimum decisions are made in terms of satisfaction or profits derived from the subsequent unit. Decision will be favourable when the satisfaction or gains from the subsequent unit exceeds the cost or it and vice versa. At the optimum level, marginal cost is equal to marginal revenue. After this point, gains are less than the costs and the production or consumption is reduced(Lunenburg, 2010). For example, Dan, a bread baker, uses marginal analysis to compare the costs and gains associated with the additional production of breads. He employs his funds and other resources to increase the production when there is high demand. The gains will be more than the cost associated with the production increase. Using the economics or other literature to identify estimates of the income elasticity of demand for at least three different products. Income Elasticity of Demand estimates: Income elasticity of demand refers to the responsiveness of demanded quantity of a good for a given change in the income of the consumer(Fouquet, 2010). It is used to estimate the future production gains associated with the rise in the income level of the consumers. It can be calculated as follows: Income elasticity of demand () The income elasticity of demand has a range from zero to infinity. As the value of elasticity gets closer to infinity, the more elastic is the good. If the magnitude is closer to zero, then the good is inelastic to the income. Income elasticity range is as follows: Value Elasticity 0 Perfectly Inelastic 0 1 Relatively Inelastic 1 Unit Elastic 1 Relatively Elastic Perfectly Elastic Income elasticity of demand bifurcates goods into normal and inferior. Normal goods have a positive relationship between income level and demand while inferior goods demand increases with the decrease in income level and vice versa(Khan, 2012). Normal goods: Income Elasticity is positive Necessity goods: Income Elasticity is positive but low Luxury goods: Income Elasticity is positive and high Comfort goods: Income Elasticity is unitary (=1) Inferior goods: Income Elasticity is negative High income elasticity of demand implies that a small change in the income of the consumer, changes the demand significantly. That is the demand is very sensitive to the change in income(Fouquet, 2010). The negative sign is an indicator of negative relation between the income of the consumer and demand of the good. This implies it is an inferior good. Positive sign implies normal goods, which can be necessities, luxuries or comforts(King Weimer, 2012). Examples for income elasticity are: Suppose Daniels income increases by 15%, his demand of bread increases by 3%. Income elasticity of bread in this case will be as follows: Bread is a necessity for Daniel. Even though his income has increased, the demand for bread is not affected much. He may increase his consumption to some extent but it is not significantly high. He will consume bread even if his income decreases. The value of elasticity is positive but low. Thus, it implies that the income elasticity of necessities is relatively inelastic. Assume that the consumers income increases by 20% and the demand of gold increases by 80%. The income elasticity here will be: As can be seen, income elasticity in case of luxury goods like gold, income elasticity is high and positive. This shows that the luxury goods are relatively income elastic. Alteration in the income of the consumer results into high demand for the luxuries. If the income of the consumer rises by 20%, the demand for public transport like busses falls by 40%. Income elasticity of public busses is as follows: The negative sign only signifies that it is an inferior good. Here, the income elasticity is negative and relatively elastic. When the income of the consumer rises, the demand for inferior good gets reduced. Since, the quality of the goods is low; people opt for better options with the increased income. They switch to cabs in the given case. References Cardinaels, E., Jia, Y. (2010). The Impact of Economic Incentives and Peer Influences. Retrieved March 09, 2018, from file:///C:/Users/%234079/Downloads/econ_incent_peers_honesty_final_draft.pdf Fouquet, R. (2010). Trends in Income and Price Elasticities of Transport Demand (1850-2010). Energy Policy, 50, 50-61. Khan, S. (2012, June). Income Elasticities of Demand for major consumption items. International Journal of Scientific and Research Publications, 02(06). King, M. K., Weimer, D. L. (2012). Price and Income Elasticities of Demand for Energy. Theory and Practices for Energy Education, Training, Regulation and Standards. Krstic, B., Krstic, M. (2015). Rational Choice Theory and Random Behvaviour. Original Scientific Article, 61(01), 1-13. Lunenburg, F. C. (2010). The Decision Making Process. National Forum of Educational Administration and Supervision Journal, 27(04). Mathis, K., Steffen, A. D. (2012). From Rational Choice to Behavioural. Retrieved March 09, 2018, from https://www.unilu.ch/fileadmin/fakultaeten/rf/mathis/Dok/1_Mathis_Steffen_From_Rational_Choice_to_Behavioural_Economics.pdf MatthewMcCaffrey. (2014). Incetive and Economic Point of View: The Case of Popular Economics. The Review of Social and Economic Issues, 01(01), 71-87.