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According to economists, a large rise in the cost of car manufacture in the United Kingdom (UK) and a general rise in incomes of households in the UK are likely to affect the sales of cars in different ways. Explain how elasticities of demand can assist in understanding the effect of each of these changes on the sales volume of cars. 

This paper explains how the elasticities of demand are useful in understanding the effect of a large rise in the cost of car manufacturing in the United Kingdom (UK) and a rise in incomes for UK households are likely to affect the sales of cars in the UK. In this economics essay, we focus on the price elasticity of demand (PED) and income elasticity of demand (YED), because the rise in the cost of car manufacturing results in a leftward shift of the supply curve, thus necessitating the concept of PED, and the rise in incomes necessitates the use of the concept of YED.

Price elasticity of demand is defined as the degree of responsiveness of the quantity demanded of a good with respect to the change in its own price, ceteris paribus.

Question: What mathematical formulae and diagrams do you think can be used here?

Suppose the cost of production of a car increase, thus resulting in an increase in its price. The use of the concept of PED is useful in evaluating the impact on the quantity demanded of the car. In the case of a Bentley, where the PED is greater than 1 since it comprises a relatively large proportion of income, an increase in the price of a Bentley results in a more than proportionate decrease in the quantity demanded of the Bentley. In the case of a Honda, where the PED is less than 1 since it comprises a relatively small proportion of income, an increase in the price of the Honda results in a less than proportionate decrease in the price of Honda. In both cases, however, we can conclude that the quantity demanded, and hence sales volume, of the different car models fall as prices increases, ceteris paribus.

Income elasticity of demand is the degree of responsiveness of the quantity demanded of a good with respect to the change in income, ceteris paribus.

Question: What mathematical formulae and diagrams do you think can be used here?

The change in quantity demanded, and hence sales volume, depends on the YED of the car model. If, like a Honda, the car is a normal necessity, where 0 < YED < 1, an increase in income results in a less than proportionate increase in the quantity demanded and hence sales volume. If, like a Bentley, the car is a normal luxury, where YED > 1, an increase in income results in a more than proportionate increase in the quantity demanded, and sales volume will therefore increase more than proportionately. On the contrary, if the car is like an inferior good like a Ford, where YED < 0, an increase in income will result in a fall in the quantity demanded, thereby reducing sales volume of the car.

Overall, the use of elasticities of demand concepts, namely price and income elasticities, are useful in helping us understand the effect of the changes on the sales volume of the different car models.

Economics Tutor's Comments - This is a strong economics essay which covers quite a few important points and arguments. However, to improve this essay, could the writer have used the concept of cross elasticity, or cross price elasticity (XED)? And could more specific examples have been used to illustrate the economic theory? What else would make this economics essay even better than it is currently? Thank you for reading, and cheers.

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