• Jim Kent

Income Elasticity in the Economist?

This is a great example of income elasticity published in The Economist this week. Or is it?

On the face of it, it looks like quite a straightforward case of reduced quantity demanded linked to falling incomes. However on closer reading there are a few other factors which could be used in an evaluation of a "to what extent are luxury goods income elastic?" question.

Firstly the shops have been closed so a lot of these goods have been unavailable and only a 7-8% are sold on line. Secondly, have incomes actually fallen? With government furlough schemes in place the fall has been reduced. Although there is no doubt average income have fallen, what about the incomes of the high earners who buy these goods? Usually it is the lower income groups who experience the highest falls in income. Also wealth? Even with a short fall in income do the buyers of luxury good still have considerable wealth? It is likely any wealth stored in stock markets will have reduced although they are recovering now. Should there be such a thing as wealth elasticity?

Luxury goods are clearly a complimentary good for intercontinental tourism which has fallen to virtually zero (para 7) and the supply side too has contacted which has meant that a lot of thee good s are simply not available.

Lastly and probably the most significant mentioned in the third paragraph is consumer confidence. This has possibly been eroded by falls in income but also by fear of a future fall income or wealth due to second waves and falling demand.

So, are luxury goods income elastic? Yes, it is likely they have an elasticity above 1 but there is a lot more to it than that.

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