9/22/2009

Current Income Elasticity of Consumers

According to the article on msnbc.com, Shoppers of All Incomes Are Changing Habits, the recession has induced consumers to rethink their shopping strategies and impulse purchases. This article indicates that many people have reduced the amount of money they spend, especially those who have incomes of under $45,000.

"New" (I quote this because it's not really new... just more noticeable now than a few years' prior) strategies include finding the lowest priced items, quality products, and using coupons. The article also indicates that there are certain items that consumers won't go without: "Topping that list is animal protein: 10 percent [of consumers] said they refuse to give up meat, poultry, fish and seafood. Four categories came in right behind that, with 8 percent saying they're not eliminating alcohol and tobacco; coffee and tea; milk and juice, or household and laundry supplies."

Predictably, the most frequently forgone commodity is clothing. The article indicates, "38 percent say they're purchasing less clothing and 20 percent said they're buying less expensive brands. Clothing is also the category most often chosen — by 29 percent — when asked what they would most likely spend more on as the economy improves."

Therefore, items such as proteins, alcohol, tobacco, coffee, tea, milk, juice, and household supplies are relatively inelastic goods with regard to income. On the other hand, clothing is an inelastic good with regard to income during this recession.

I can see these elasticities in my own home. One thing I won't cut out is food and household supplies. Can others relate to these products? Are you cutting back? What items are you cutting back on?

6 comments:

Brooklyn said...

I know I am not cutting back on the basic food products meat and poultry being a staple but I have cut back on cookies and some snack foods that I don't really need. As far as clothes I definitely have cut back, I can make what I have last. It will be interesting to see what kind of lasting effects this recession will have on the income elasticity of consumers.

Dr. Tufte said...

I like this post quite a lot - I think Amelia has given her brain a good workout.

One typo though: if the other stuff is inelastic, then clothing appears to be elastic.

One thing I wonder is how many people are cutting back even though their income hasn't declined?

Jonathan said...

My wife and I both graduated with our Bachelors at the same time in 2008 right when the economy started going down but unlike most Americans, our income probably tripled because of our new jobs with our degrees.

I realize we are extremely fortunate and outside the norm, but I haven't noticed anything in particular that we have cut back on because I feel like we still shop about the same, for groceries and clothes.

To answer Dr. Tufte's question, we have become more aware that our economic situation isn't good so we have tried to bolster up our savings account and put money in our IRAs. We have learned that we can't depend on the government to retire so we need to save now.

Jayden said...

Like Jonathan, I haven’t experienced a decrease in income, but I have tried to reign in my spending. One thing I’ve cut back on is eating out at restaurants. The article states that 45% of respondents say “they’ve cut back on food they don’t cook themselves, whether from the grocery store, restaurants or takeout.” Judging by the number of local restaurants that have gone out of business, I’d say eating out is something a lot of us are cutting back on.

Rebecca said...

With regard to Tufte's question which goes to consumer confidence. I think that even where income has not decreased and directly affected disposable income there is a consumer response to cut back on non-essentials because the outlook is uncertain. Uncertainty can lead to fear and that is one motivation that stimulates behavioral change.

Irrational choices or insignificant savings, people just do things to make themselves feel better. Now how disciplined will we be once consumer confidence starts to grow? Consumption is so ingrained in our culture that we won't be able to keep it lean for very long.

Christopher said...

Amelia: While the statement “Therefore, items such as proteins, alcohol, tobacco, coffee, tea, milk, juice, and household supplies are relatively inelastic goods with regard to income. On the other hand, clothing is an inelastic good with regard to income during this recession.” is true, I think that it is important for us—as aspiring business leaders—to remember that though a general market for a particular product or service may be relatively income inelastic, the income elasticity of certain brands of such product or service might be a completely different story. This might be what the surveyed people from the article meant by “[we’re] buying less expensive brands.”
For instance, let’s consider the market for milk. As you’ve already demonstrated, it seems that people’s demand for milk in general is quite consistent regardless of income, thus, your conclusion that milk is relatively inelastic with respect to income. However, do all brands of milk enjoy the same inelastic nature? In other words, as incomes increase, drop, or become uncertain, does the demand for Meadow Gold milk (about $4.00 per gallon) and the demand for Great Value milk (about $2.00 per gallon), Wal-mart’s in house brand, remain relatively consistent? The answer is absolutely not. As incomes drop or are expected to drop, the demand for milk in general remains relatively consistent, but it is quite reasonable to assume that a marginal number of consumers will switch from buying Meadow Gold milk to buying Great Value milk. And as incomes rise or are expected to rise, the demand for milk in general remains relatively consistent, but it is quite reasonable to assume that a marginal number of consumers will switch from buying Great Value milk to Meadow Gold milk. Thus, though milk in general is considered to be relatively inelastic with respect to income, certain brands of milk are definitely not inelastically equal with respect to income.
Consequently, it is important for a business to understand the elasticity of the general market for the products and/or services that it offers, and it is equally import for a business to understand the elasticity of its particular brand of such products and/or services. If a business assumes that its products and/or services simply possess the same elasticities as that of the general market for such, then it risks overproducing in some periods and underproducing in others.
On another note, does this mean that certain brands of the exact same product or service can actually be substitutes of each other? Up until now, I assumed that substitutes had to at least be different products. Interesting...