Exploring Income Elasticity of Demand

an image to show the increasing demand for ramen

Econoville is experiencing rapid economic growth. The government and local firms are keen to understand the impact of this growth on consumer demand for various goods.

One of the leading firms in Econoville, “GoodTimes Inc.”, produces three main products:

  1. GoodTimes Basic (GTB) – an affordable, no-frills version of their product.
  2. GoodTimes Premium (GTP) – a more luxurious, feature-rich version of their product.
  3. GoodTimes Basic Plus (GTBP) – a slightly enhanced version of GTB. It has more features but is still much more affordable than GTP.

The government has collected data on consumer spending patterns over the past 5 years, as shown in the table below.

Task for Students:

  1. Calculate the YED for all three goods between Year 1 and Year 2.
  2. Determine if GTB, GTP, GTBP are normal goods or inferior goods.
  3. Draw a simple Engel Curve for GTB, GTP, and GTBP with the y-axis representing Real National Income and the x-axis representing the quantity of goods sold. (Don’t worry too much about scale!)
  4. Calculate YED for all three goods between Year 4 and Year 5. 
  5. Determine again if GTB, GTP, GTBP are normal goods or inferior goods and explain any differences in the elasticities compared with Year to Year 2. 
  6. Analyse how GoodTimes Inc. can use this information to make decisions about pricing and production for their products.
  7. Analyse how the government of Econoville can use YED data to inform policy decisions.