Income elasticity of Demand YED

YED measures the responsiveness in demand when there is a change in income:

%change in quantity demanded/%change in income

 

Normal goods are goods that have a positive YED, and inferior goods are goods that have a negative YED.

When income increases then demand for Normal goods increases, the more elastic a good is, reflects how much demand would rise.

Income inelastic: Is where goods for which a change in income produces a less than proportionate change in demand

 

Income elastic: os where goods for which a change in income produces a greater than proportionate change in demand

 

An example of a normal good is where income increase by 5%, this then leads to an increase of Apple Ipads by 8%, so remembering that negative and positive signs matter here, as a (+) sign means that the good is normal and if it is (-) sign it means that it is an inferior good, the YED is 1.6, this is YED elastic, so what does that mean for apple?

Well because it is a normal good:

• It tends to expand when income grows
• Apple will increase locating and advertising in high income areas
• they will do badly in a recession

And what if it was an inferior good that was effected?:

• They expand during recession
• Inferior goods will be more popular in low income areas
• Do well during recession

 

 

 

Public & Private goods

Public goods are goods that are collectively consumed and have the characteristics if non-excludability and non-rivalry

It is therefore impossible to charge for these goods directly, so the government finances them from general tax revenue. if public goods were left to the free market. Then they may not be provided even though there are benefits for those that consume them.

Non excludability: Is a situation where existing consumers cannot be excluded from consumption

 

Free rider: Someone who directly benefits from the provision of a public goods even though they pay no contribution towards its provision

 

Non-rival: Situation existing where consumption by one person does not effect the consumption by another person

 

Example time…..

Lets take the police as an example….

it is funded by the local council, indirectly paid for by the tax payers. It is free for public use so anyone can use them, regardless if they have paid for it indirectly or not. If one person has access to the police force, it does not mean that other people do not get the local protection. This is known as Non excludability.

Non rivalry in the police example is where one person is being protected by the police, it does not mean that the rest of the community would get any less attention or protection.

Street lights are another great example of a public good. Once one is installed, it operates for the benefit of everyone who passes under it- It is non-excludable. It is also Non-Rival because all people would benefit in the same way. It would be virtually impossible to  charge or collect some form of a toll for using it, therefore the private sector would not consider it a provision and therefore not produce it.

 

 

Private goods are the opposite of public goods

They are Rival and they are Excludable 

An example would be a bottle of coke. It is excludable because when the consumer buys the coke they are excluding other people from having the chance to buy that coke or have access to it. Therefore it is Excludable. It is Rival because if someone consumes some of it; then there is less coke for the person who originally brought it.

Quasi-public goods

These types of goods, possess some, but not all characteristics of public goods, most tend to have the non-excludability characteristic, but not the non rivalry. So they therefore have qualities of a private good

 

A stretch of motorway can be seen as an example. Most roads in the Uk are provided out of the Tax revenue, at no charge to the user. In principle, any person who can legally drive and own a vehicle can use the roads, including overseas visitors. road space is becoming increasingly rival as shown by rivalling levels of congestion. If everyone in the uk used their vehicle at any one time then gridlock would occur.

 

The Severn bridge is a weird sort of quasi-public good. This is because going south it is free, so people going that way only are not excluded, however a toll is charged across the bridge, if you do not pay the toll your excluded from using it. Furthermore Rival is present, this is because due to the level of congestion the bridge may be busy at times…

 

 

Costs and benefits

Externalities ( Look at the previous post for a reminder)  tend have costs and benefits, in this section we are going to be exploring these costs and benefits.

Private costs and benefits

these are costs and benefits that are experienced by those directly taking part in a certain action.

Private benefits: are the benefits that are the costs incurred by those taking a particular action

private costs: Are the costs incurred by taking a particular action

An example in action

If an airport was made, then the Private costs involved in making the airport would be the investment that goes into it. Private costs can even fall onto the users of the new airport because they have to pay themselves to use it.

The private benefit of building the airport would be the increased revenue, that would arise from the business that invested their own money into building it. The private benefit to the people using the airport (the consumers) would be that they get the joy of going on holiday, going on a plane from that extended airport

External costs & Benefits

These are the consequence of the externalities that arise from a particular action. They are not paid for by those responsible for it. Instead they fall onto third parties.

If we look at the airport example again…

External costs

Increased noise problems for those living near the new airport. this may force the owners of the houses to soundproof their homes at their own expense even though they did not cause that particular action that resulted in the externality.

External benefits

people living near the airport may need to travel less to go on flights, at no extra cost to them. Also if some flights got transferred to this new airport, people living near other airports would have to deal with less noise.

Important definitions

Social costs: the total cost of a particular action

social benefits: the total benefits of a particular action

private costs: the costs incurred by taking a particular action

private benefits: the benefits incurred by taking a particular action

external costs: the cost that is a consequence of externalities to third parties

external benefits: the benefits that accrue as a consequence of externalities to third parties

Social costs and benefits

These are C & Bs (costs and benefits) that may have an effect on a larger scale. If (Once again)we go back to our airport expansion example…

Social costs

Co2 emissions as a result of increased amount of aircrafts and consumers using the airport, loss of land for building the airport and increased congestion.

Social benefits

Additional jobs can be created as a result of the airport expansion and increased business for businesses that use the airport due to passengers.

Moving on

See here is the problem.

when private costs or benefits do not equal social costs or benefits then we have a situation where the market fails to allocate resources efficiently.

Negative externalities

this is when the social cost is greater than the private cost. SO basically the costs imposed on the third parties is greater than the private costs by those responsible for the activity.

1. the disposal of chewing gum is a major problem as when chewing gum sticks to somebody shoes it is social cost as they have to remove it. It costs 10p to remove gum from the pavement. Some councils spend over 100,000 annually removing gum from the streets.
2. binge drinking is obviously a negative externality, as the private cost, (which would be buying the drinks and etc…) is less than the social costs, which could include damage of property, NHS cover and noise and disruption for the local community. To counteract these costs, people would need to pay to repair their property at their cost. The government would have to put more of their resources to the NHS sector that deals with Liver transplants and other alcohol related issues which is at an extra cost to the tax payer as well.

Positive externalities

This exists when the social benefit is greater than the private benefit. So as a result the benefit to a third party is greater than than the benefits that are received by those responsible for carrying out the action.

1. education and training is a good example, this is because they all produce private benefits such as additional skills and better job prospects. There are also even bigger SOCIAL benefits such as better qualified employees for businesses and longer term growth for the economy as a whole