hello. I've been given this homework, which is a data response questions on page 64-65 of my textbook - Economics Third Edition by Alain Anderton. However i do not understand the charts and can not analyse it. Please help as the homework is due on Wednesday.
I've already asked some questions relating to the homework which has been returned by marker...thanks but i do not understand the charts in the textbook and can't analyse the trend or what it shows.
your ever grateful e-student
etutor answers: Answers to Anderton questions
1(a). Between 1990 and 1997/8 the % of income spent on leisure goods has remained
broadly unchanged at 5%, but the % of income spent on leisure services has risen
from about 9% to 12%.
1(b). In the case of leisure goods spending as a % of total spending varies
from about 5.5% in the highest group (8th decile) to about 3.5% in the lowest
group (2nd decile). In general, higher income groups spend a slightly higher
% of income on leisure goods than do lower income groups. There is a marked difference,
however, in the case of leisure services, which account for about 8% of spending
in the lowest income decile but nearly 15% in the highest income decile. There
is a clear pattern here – as income increases, there is an increase in
both the amount spent on leisure services, and in the proportion of income spent.
2(a). Income elasticity of demand is calculated by dividing the % change in
quantity demanded by the % change in consumers’ incomes. If the resulting
coefficient is greater than 1 (and positive) demand is said to be income elastic;
if less than 1 (and positive) demand is income inelastic. Looking at the data
for leisure goods, and at the income levels for the lowest and highest income
deciles, the lowest income group (with incomes below £88) spends £4.40
a week on average, while the highest income group (with incomes above £849)
spends £38.20 a week on average. Hence those with incomes nearly ten times
higher spend about nine times as much each week on leisure goods. This suggests
that the income elasticity of demand is slightly less than 1. In the case of
leisure services, the amount spent on average each week rises from £7.90
to £107.20. So for an increase in income of nearly X10 the spending on
leisure services rises by about X13. Hence the income elasticity of demand for
services is greater than 1. I conclude therefore that the income elasticity of
demand for services as a whole is higher than the income elasticity of demand
for goods as a whole.
2(b). Looking at individual leisure goods and services, those with the highest
income elasticity are goods/services where the % increase in spending each week
is at its greatest when comparing the lowest and highest income deciles – i.e.
wherever the % increase in spending is markedly greater than the % income increase.
Goods falling into this category are: books, maps and diaries; sports and camping
equipment; photography and camcorders (and to a lesser extent TVs, videos, computer
and audio equipment). Services falling into this category are: education and
training; and hotels and holidays abroad (and, to a lesser extent, sports admissions
and subscriptions, miscellaneous entertainments, and cash gifts/donations).
3 (a/b). From the chart it can be seen that books (with maps and diaries)
have a higher income elasticity than newspapers. Assuming incomes continue to
grow over time, books would seem to have a more promising sales future than newspapers – more
is spent on them each week, while they have a higher income elasticity. Moreover,
over time, newspapers may become less and less important, since consumers have
access to an increasing variety of alternative sources of information and entertainment – as
seen, for example, in the sums spent on (and higher income elasticities of) magazines,
TVs, computers, etc. So in the long run, book sales are likely to increase (though
not at a rapid rate – and much depends here on the TYPE of book publisher
being acquired) while newspaper sales seem set to decline still further (except
perhaps in the case of some of the broadsheet papers). So this acquisition strategy
is an exercise in risk diversification, though it should be pointed out that
other areas of communication or entertainment might be more profitable targets,
given their higher income elasticities.