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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as always, S. S., the editor of JC Economics Essays, edited this economics
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