ECO100: Business Economics Report on Income Elasticity

This report examines the impact of toll charges on the income elasticity of demand, using the City Link toll increase as a case study. It begins by defining income elasticity and its different types, including normal and inferior goods, and income elastic versus inelastic demand. The report then analyzes the effects of the 11% toll increase, considering the impact of GST. It explains how different income levels influence road usage, with lower-income individuals showing higher elasticity. The analysis highlights a significant decrease in road usage due to the higher toll, indicating high income elasticity for the toll road. The report references relevant economic theories and provides a conclusion based on the observed data, supported by academic references.

Running head: BUSINESS ECONOMICS
Business Economics
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1BUSINESS ECONOMICS
Table of Contents
Relation between income elasticity of demand and rise in toll charges.....................................2
References..................................................................................................................................4

2BUSINESS ECONOMICS
Relation between income elasticity of demand and rise in toll charges
Income elasticity of demand is measure for estimating relative responsiveness of
demand following a change in income.it is computed as a percentage change in demand due
to a percentage change in income (Parkin & Bade, 2013). Income elasticity of demand is
estimated using the following formula
Income elasticity of demand= Percentage change∈demand
Percentage change∈income
For some goods demand increases with increase in income. These are normal goods
and have a positive income elasticity of demand. The measured income elasticity of demand
in this case is greater than zero. There are goods for which demand falls with increase in
income. These are inferior goods having a negative income elasticity of demand. The
measured income elasticity of demand in this case is less than zero (Baumol & Blinder,
2015). Type of income elasticity of demand again depends on nature of the good. For
necessary goods, proportionate change in demand is less than the proportionate change in
income. Income elasticity of demand in this case is less than 1 and the good is said to have
relatively income inelastic demand. However for luxury goods, people have a tendency to
increase demand greater than the proportionate increase in income. Income elasticity of
demand in this case is greater than 1 and income inelasticity of demand for the good is
relatively elastic.
As given in the case study, the city link toll has increased to 11 percent after July 1.
The increase in toll tax takes into account GST imposed by the government along with a
regularly quarterly toll increase of above 1 percent. The immediate impact of increase in toll
is to increase in the cost of using the toll road. The degree of change in use of the road
depends the income elasticity of demand. Income elasticity of demand is dependent on level
of income of the household and percentage share of income spend on the specific good

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(Cowell, 2018). Now, the road is used for various purposes by people having different levels
of income. Use of road also varies according to purpose of use. People with high income face
a relatively lower income elasticity of demand for toll road. For this people, there is a
relatively smaller decline in the road use. People having a low level of income has a
relatively higher income elasticity of demand. Due to GST as people face a higher tax burden
they experience a relatively smaller income. This leads to a relatively larger decline in use of
the toll road. This is the case happening to city link toll road. Higher toll road is making it
difficult for most people to use the road (Cowen & Tabarrok, 2015). Number of vehicles in
the road has lowered significantly due to increase in toll tax. The recorded number is below
the expectation. This shows high income elasticity for toll road. People though enjoy a cut in
income tax due to GST but that may not be sufficient to pay for petrol and toll.

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References
Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Nelson
Education.
Cowell, F. (2018). Microeconomics: principles and analysis. Oxford University Press.
Cowen, T., & Tabarrok, A. (2015). Modern principles of microeconomics. Macmillan
International Higher Education.
Parkin, M., & Bade, R. (2013). Foundations of microeconomics. Pearson.