Question

Case study 2 -Car crazy As countries develop and get richer, one of the first things people want is a car. China, one of the fastest-growin in the word, now has an insatiable appetite for cars. With rapidly rising incomes, the once common bicycle way to the car. The income elasticity of demand for cars in China is estimated to be almost 1 . In 1980 the wunus moon populous economy had a mere 60,000 cars and an income per capita of $250. In 2017, income per capita was $17,000 and car ownership in China reached 217 million, making China the biggest car market in the world. In 2017 the number of new registered cars in China was 24.2 million, while in the US it was 17.2 million. Whereas in the 1970 s a worker had to save for a year to buy a bicycle, incomes are now so high that workers only have to save for a year to buy a car. Income elasticties of demand help us make confident predictions that rapidly rising I ining standards in countries such as china and India will lead to massive increases in the demand for cars, mobile phones, energy, air tavel, and many other goods and services enjoyed in the afflluent West. Since many of these are the source of emissions that lead to glooal warming, the very success of emerging economies adds new urgency to the need to find ways to reduce emissions, either by finding new, cleaner technologies or by coordinated govemment policies to discourage the activities with which harmful emissions are associated. Source: Acapted from Huiren Lee and HsinHHong Kang (2015), "The Effects of the Global Financial Crisis on Automobile Demand in China', International Joumal of Economles and Finance 7(9); 226-236; data taken from the Word Bank and the Word Heath Organization (WHO).

1] Define the economic concept of the income elasticity of demand.
2] Shortly discuss which factors you consider to be driving the sudden increase of car ownership in China.
3] Briefly explain What does the income elasticity of automobiles in China tell us about the benefits of growth in China and the rest of the world?

Answer 1

The income elasticity of demand measures how quantity demanded of a product changes with income changes, with positive elasticity indicating normal goods and negative for inferior goods. In China, the surge in car ownership is driven by increased income, urbanization, and supportive government policies. The income elasticity for automobiles in China reflects increased consumer purchasing power and living standards but also emphasizes the need for sustainable environmental solutions.

Step-by-step explanation:

Income Elasticity of Demand

The income elasticity of demand is a measure of how the quantity demanded of a good changes in response to a change in consumers' income. It is calculated as the percentage change in quantity demanded divided by the percentage change in income. When this elasticity is positive, it indicates that with an increase in income, the demand for the product will also increase—these goods are known as normal goods. Conversely, if the elasticity is negative, the product is an inferior good, meaning demand decreases as income rises.

Factors Driving Car Ownership in China

The surge in car ownership in China can primarily be attributed to rising incomes, which have transformed cars from luxury items into more affordable commodities for a broader range of people. Additionally, urbanization, improved car availability, and government policies facilitating the automotive industry have significantly contributed to this increase in demand.

Impact of Income Elasticity on Growth Benefits

The income elasticity of automobiles in China, which is close to 1, suggests that cars are seen as a necessity or a symbol of a better lifestyle as incomes increase. This rise in car demand correlates with economic expansion, suggesting that the benefits of growth include increased consumer purchasing power and improved standards of living. However, it also highlights the increased need for cleaner technologies and environmental policies to combat the potential growth in emissions.