The Rich Drink Better Beer, Not More

The average item bought by the average buyer has an income elasticity of nearly one: most people roughly double their spending when their income doubles. But everything we buy consists of both a quantity dimension and a quality dimension.

What’s clear is that the income elasticity of demand for quantity is less than one: when our income doubles, we don’t double the number of cars we buy, the number of beers we drink in a day, or the number of houses we own.

The income elasticity of demand for quality must therefore be more than one: as our incomes rise, we increase the quality of what we consume. We shift from Honda Civics to Lexuses (Lexi?), Budweiser to Belgian dobbels, prefab houses to mini-mansions.

The reason is simple: it takes time to consume quantities, while the consumption of high-quality goods takes no more time than low-quality goods; and as we get richer we have no more time — we all face 24 hours in the day.

With incomes rising over time, businesses are smart to bet on the demand for quality rising — and to enter markets where the payoff is to quality not quantity.

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  1. Cris says:

    Cheers for those good’n old days of cheapo MGD !

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  2. RR says:

    From what I’ve seen the homeless drink the most beer.

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  3. Joe says:

    This just in – increased purchasing power does not result in more than 24 hour days

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  4. Kyle says:

    I always figured that when I graduate from school and become fabulously wealthy (hey, it’ll happen), I will still buy a used car, a small house, and cheap beer. That is of course so that I can go live the life of ultra luxury when I travel.

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  5. SJ says:

    So more narrowly – Lexi, BMWs, etc are normal goods while Hyundai and Toyota are inferior

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  6. Richy Rich says:

    This is not always true. Some people do not use all of their available time for an activity or item until their income allows it. So a quantity increase ratio of 1 or more is entirely possible when one’s income doubles.

    * 1 round of golf a month up goes up to 2 rounds
    * 1 beach/ski/golf vacation a year goes up to 2
    * 1 vacation home to 2 vacation homes
    * 1 home computer to 2
    * 1 pet to 2
    * 1 TV to 3 (living room, bedroom, rec room)
    * 1 watch to 3
    * 1 purse to 4

    You could also see how easy it would be to have a ratio of infinity (n/0).

    If you never owned a boat, and you doubled your income, you would go to 1 boat from 0. A ratio of infinity.

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  7. John says:

    Even though it may seem like a duh moment, I’m not sure that the epiphany that increased purchasing power does not result in more than 24 hour days is accurate.

    I would hazard a guess that the more one earns may also corrolate with an increased ability to have more access to disposable time. In my 20 years of working, the higher I have seen people climb up the corporate ladder, the more I have witnessed their self determinative ability to take long lunches or wednesday afternoon’s off to play golf, or even a three day weekend to get away…not to mention access to airline flights when travelling that cut in half or greater trip time in cars or buses of the poorer working class.

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  8. Miss Middle of Manchester says:

    An increase in purchasing power can buy you more time though.

    If you’re rich enough to afford a dishwasher, you gain half an hour a day (ish), or a better washing machine will mean shirts take less time to iron, you can afford pre-prepared salads instead of cutting and mixing your own, you can afford a maid, a cook, a nanny or an au pair.

    You can afford a car instead of having to cycle to work. Or, if you live in a city, you can afford a bike in order to avoid sitting in traffic. Your broadband internet is faster, you move to a nice house so the time you spend waiting in telephone queues is shorter.

    Sure, there are only 24 hours in a day, but being rich can ‘buy’ some of them back.

    They can then spend that time drinking more, really expensive beer.

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