Income elasticity of demand

A higher income country will tend to have:

• A proportionally smaller manufacturing sector than a lower income country.

• A proportionally smaller primary sector than a lower income country.

• A proportionally larger primary sector than a lower income country.

• A proportionally smaller service sector than a lower income country.

During a recession, will the producer of an inferior good expect sales to increase or decrease?

(a)  

If a product's YED > 1 and the national income is expected to grow in the following two years, will the producers of this particular product likely experience a decrease or an increase in sales?

(a)  

Answer explanation

Products with a YED > 1 are goods whose demand is very responsive to changes in people's incomes. They are usually superior goods. Their demand increases proportionally more than the increase in income. When the economy is experiencing an increase in income, the demand and quantity demanded of superior goods increase greatly, as do sales for producers of these goods.

True or false? Changes in the determinants of PES shift the supply curve.

(a)  

Answer explanation

Changes in the determinants of supply produce shifts of the supply curve. The determinants of the price elasticity of supply (PES) have to do with movements along the supply curve, because they influence how sensitive the quantity supplied of a good is to a change in its price.

In which of the following cases will supply be inelastic?

• When the firm has a lot of stock

• When it is easy and not costly for a firm to increase or decrease production

• When a long period has elapsed since the price change

• When the firm is operating at full capacity

Which of the following would have the most elastic supply?

• Fresh fish just arriving in the port to be sold

• Downloadable video games

• Office cleaning services

• Aeroplanes

Which of the following is the reason for a lower PES in the case of primary commodities in comparison with manufactured goods?

• The lack of substitutes

• The fact that they are necessary goods

• The fact that they need a longer period to adjust production

• None of the proposed options are correct

Answer explanation

Primary commodities usually need larger periods of time to adjust production to price changes than manufactured goods; the time period and amount of investment needed usually makes producers unable or unwilling to increase production immediately. Therefore, they have a more price inelastic supply.

Put the following goods in order from low to high elasticity of supply (you might have to do some quick research on the two food crops):

bread

streamed video game

coffee beans

bicycles

cassava

• Bicycles, coffee beans, bread, streamed video game, cassava

• Streamed video game, bread, bicycles, cassava, coffee beans

• Coffee beans, cassava, bicycles, bread, streamed video game

• Bread, streamed video game, coffee beans, bicycles, cassava

Answer explanation

Coffee beans, cassava, bicycles, bread, streamed video game

Explanation

Both agricultural goods will have a lower price elasticity of supply than the other products because they have a specific planting season and time period needed to grow and harvest them. However, it is possible to harvest cassava as needed over a longer period of time, while coffee has a specific harvest time once per year. Bread, bicycles and streamed video games do not have a specific production season. Bread is faster, easier and less expensive to produce at short notice than bicycles are. But once an online video game has been produced, it can be accessed virtually without limits. The quantity supplied can be increased or decreased within seconds depending on demand.