People’s income dictates their spending habits. An example is people from the middle class. They always use busses to go to their places of work. If their class is elevated by an increase in income, they will opt to buy their own vehicles. This is a good example of income elasticity of demand. SteamScot’s rail services are inferior to other modes of transport such as the use of busses and hire of caravans. Most people use SteamScot because it is a cheaper means of transport as compared to the other modes of transport. If the government decides to reduce tax on the salary of residents, there would be a percentage increase in income per person. A percentage increase in income will enable the local tourists (which make up 70% of SteamScot’s clients) to afford other means of transport. When this happens, demand for the services of SteamScot will reduce. This is so because if the customers can afford other means of transport, they can easily give up on SteamScot’s services.
The demand for SteamScot’s services, in this case, is said to be elastic. Its degree of necessity will be affected by the income of the customers. Income elasticity of demand is a measure of the ratio between the percentage increase in income to the percentage decrease in demand as far as inferior goods are concerned. An increase in the percentage of the income of individuals will imply a low-income elasticity of demand. If the demand for a commodity increases with an increase in income, the product is said to have positive income elasticity. Consequently, if the demand decreases with an increase in income, it is said to have negative income elasticity. The services of SteamScot, therefore, are said to have negative income elasticity. This is merely due to the fact that it is an inferior product.
The costs incurred when buying a car are a considerable portion of a person’s income. If the salary is increased by the reduction of income tax, the percentage of income to be spent on buying a car will reduce. This will further encourage residents to forego the services of SteamScot for personal transportation.