The table below shows the annual average level of income in a country and the corresponding demand for Product A for two years. Year 1 Income (£) Product A (units) Year 1 57,000 100 Year 2 63,000 200 (i) Calculate the income elasticity of demand (YED) for Product A. Show your workings. (ii) Using your knowledge of YED, explain the economic meaning of this figure you calculated in (i) above.

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The table below shows the annual average level of income in a country and the corresponding demand for Product A for two years - Leaving Cert Economics - Question 6 - 2016

Question 6

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The table below shows the annual average level of income in a country and the corresponding demand for Product A for two years. Year 1 Income (£) Product A... show full transcript

Worked Solution & Example Answer:The table below shows the annual average level of income in a country and the corresponding demand for Product A for two years - Leaving Cert Economics - Question 6 - 2016

Step 1

Calculate the income elasticity of demand (YED) for Product A.

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Answer

To calculate the income elasticity of demand (YED), we use the following formula:

$\text{YED} = \frac{\text{Percentage Change in Quantity Demanded}}{\text{Percentage Change in Income}}$

Determine the changes:
- Initial Income (Year 1) = £57,000
- New Income (Year 2) = £63,000
- Initial Demand (Year 1) = 100 units
- New Demand (Year 2) = 200 units
Calculate the percentage change in quantity demanded: $\text{Percentage Change in Quantity Demanded} = \frac{(200 - 100)}{100} \times 100 = 100\%$
Calculate the percentage change in income: $\text{Percentage Change in Income} = \frac{(63,000 - 57,000)}{57,000} \times 100 \approx 10.53\%$
Substitute into the YED formula: $\text{YED} = \frac{100\%}{10.53\%} \approx 9.49$

Thus, the YED for Product A is approximately 9.49.

Step 2

Using your knowledge of YED, explain the economic meaning of this figure you calculated in (i) above.

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Answer

The calculated YED of approximately 9.49 indicates that Product A is a luxury good. Here’s why:

Positive Sign: The positive value of YED implies that as income increases, the demand for Product A also increases. This aligns with the general understanding of luxury goods, where demand rises more than proportionately as income rises.
Magnitude Greater than 1: Since the YED is significantly greater than 1, it means that the percentage increase in quantity demanded is greater than the percentage increase in income. In practical terms, consumers are spending proportionally more on Product A as their income rises, demonstrating that the product is highly responsive to changes in income.

Therefore, a YED of 9.49 not only confirms that Product A is a luxury good but also reflects strong consumer sensitivity to income changes.

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The table below shows the annual average level of income in a country and the corresponding demand for Product A for two years - Leaving Cert Economics - Question 6 - 2016

Worked Solution & Example Answer:The table below shows the annual average level of income in a country and the corresponding demand for Product A for two years - Leaving Cert Economics - Question 6 - 2016

Calculate the income elasticity of demand (YED) for Product A.

Using your knowledge of YED, explain the economic meaning of this figure you calculated in (i) above.

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