Income Elasticity of Demand Versus Income Elasticity of Consumption

14 Pages Posted: 22 Feb 2018

See all articles by Hamed Ghoddusi

Hamed Ghoddusi

Stevens Institute of Technology - School of Business

Mandira Roy

Massachusetts Institute of Technology

Date Written: February 12, 2018

Abstract

The income elasticity of consumption depends not only on the demand function but also on the characteristics of the supply function. If supply is not completely elastic, the income elasticity of consumption will be less than the income elasticity of demand, with the difference depending on the shapes of both the demand and supply functions. We show if supply is sufficiently inelastic, extending the individual level estimates of the income elasticity of demand to aggregate values can produce erroneous and misleading policy conclusions. We suggest that the economics teaching and analysis carefully distinguish between the income elasticity of consumption for a good in a specific market (the observable quantity) and the income elasticity of demand (an unobservable function).

Keywords: Supply Elasticity, Demand Elasticity, Demand Shift, Rebound , Engel Curve

Suggested Citation

Ghoddusi, Hamed and Roy, Mandira, Income Elasticity of Demand Versus Income Elasticity of Consumption (February 12, 2018). Available at SSRN: https://ssrn.com/abstract=3122844 or http://dx.doi.org/10.2139/ssrn.3122844

Hamed Ghoddusi (Contact Author)

Stevens Institute of Technology - School of Business ( email )

Hoboken, NJ 07030
United States

HOME PAGE: http://www.ghoddusi.com

Mandira Roy

Massachusetts Institute of Technology ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

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