# 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.

#### Alex F

I think your math is wrong.

Let expenditures = quality (in \$ units) * quantity, and say that the income elasticity of expenditures is (trivially) 1.

It does not hold that (elasticity of quantity (elasticity of quality >1). I'm not sure what the model in your head is -- that elasticities should average to 1? That they should multiply to 1?

Anyway, the correct result is that elasticities *sum* to 1. So no, not only is it not true that the income elasticity for quality must be greater than 1, it actually must also be less than 1 (as long as quantity isn't declining, ie, the elasticity is nonnegative).

Think about it this way: If the elasticity of quantity is 0, then the elasticity of quality would have to be 1. If you're spending twice as much on cars and you're only buying one car, then you aren't spending *more* than twice as much per car, you're spending exactly twice as much per car.

#### Responsible Consumer

Who says the 99% have to purchase 99% of the goods and services? I am middle class. I paid off my mortgage in 13 years. I bought 2 new cars back in 2003 and have no payments on them. I pay off my credit cards every month. I save for retirement in a 401k every month.

I do not live a miserly life. We eat out about once a week. We take vacations. We have nice electronics (TVs, computers, cell phones etc.).

We just make smart consumer choices and live within our means. Haven't bought a big flat panel HD TV yet (own a 32" HD flat CRT - prices will come way down for 42"+ LCDs). Drive reliable, efficient cars instead of BMW/Lexus/Volvo/etc. Handle all our own lawn care. Subscribe to a mid-tier cable TV package. Clip coupons. Use VOIP for long distance calls. Take extravagant vacations only every 2-3 years (Cancun, Disney, Hilton Head) and more modest vacations in between.

Everyone above the poverty line can live within their means. It's all about the choices you make. If you have to have that \$2,500 52" plasma TV right now, you might find yourself needing credit. It's a slippery slope when you live beyond your means.

#### Becky

If I had a million dollars
We wouldn't have to eat Kraft Dinner
But we would eat Kraft Dinner
Of course we would, we'd just eat more
And buy really expensive ketchups with it
That's right, all the fanciest ke... dijon ketchups!
Mmmmmm, Mmmm-Hmmm

#### Ed

I've been trying to make a point that economists seem to dance around or maybe I haven't explained it adequately, so here goes again: Total GNP is \$1000.00 (for the sake of argument). Top 1% get \$100.00. That only leaves \$900.00 for the 99% to buy \$999.00 worth. The only way they can buy it is to have credit issued. I know this is an oversimplification but it seems the principle is sound. Conclusion: capitalism cannot flourish without the extension of credit to the working class, and they (by their position in the pay scale), will never be able to be out of debt.

#### Steve

PBR Pfffffffftttttttt!

Give me a Pigs Ass Porter any day.

#### Linus L

I am sure the quantity increase for a doubling of a lower class income is much greater than the quality increase, but the delineated premise seems applicable if one can be said to "practically" already have a sufficient quantity of life's "necessities".

#### RR

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

#### misterb

@18,

I think you may have qualified Dr. Hamermesh's point. As you said, there is good music out there *if you look for it*. In my statement (#9) I said that baby boomers, as they grew richer ,seemed to enjoy weaker music even though (at iTunes, at least) costs are the same for good vs bad music. I was assuming that the cost in time as well is the same(We don't tend to listen to music at half-speed or double-speed). But you showed a new twist. The cost of *choosing* new music is what keeps us old folks in the doldrums of Classic Rock.
In our poverty-stricken youth, we had all the time in the world to listen to *bad* music, reject it, and move on to the good. Now that time is valuable, we stick with what we know, because the cost of *bad* music has increased.
If we want to cap this argument Freakonomics style, we would look at the patterns of iTunes use by age group. If my hypothesis is correct, then older people will jump straight to the tried and true when they purchase, while the young or unemployed will sample lots of possibly bad tracks.

#### ricE

In Singapore, as income rises, they shift from the Toyota to BMWs, and change a new BMW every year. That's how to accelerate the consumption of high-quality goods. Super-Conspicuous consumption.

#### Thomas B.

"This is why a flat tax will never work, the demand curve tapers off as someone becomes more wealthy. This would make a flat tax structure not just regressive, but repressive."

Yeah, but we're hardly better off with a system that lets Warren Buffett pay 18% of his income in tax, while his secretary pays %30.

A simple but progressive tax seems like the best of both worlds. Keep the postcard sized return, but throw an upward sloping curve into the tax equation. What do you think?

#### Kaushik Krishnan

True. But couldn't it also be psychological? Most people don't think so hard. When I get richer, I probably don't tell myself `H'm. I have more money, but the same amount of time to spend it, so I'll buy better things'. It's probably, `I'm richer. Hence, I want to/am expected to flaunt it. Also, I have money to burn (and I don't know what to do with it really) so I can buy better stuff. Let's get me some Belgian beer!'

#### anonymous giver

no matter how rich or poor I am, most alcohol tastes do nothing for me. However, if I was with certain people i know who are rich, they would offer me some world famous expensive import and probably insist that I try it, that it would be better and not bitter. I do not know how to explain that my taste buds refuse to be overridden by their luxury standards.

I discussed this yesterday with someone. It was in the context of me refusing a drink, when in that culture it is rude to refuse something that is offered. It's terrible to have to pour a rich man's alcohol down the drain secretly, and against my own culture to be wasteful.

Now I'lI accept the richman's drink even if it gets me upset that I have to. It's better than getting my testosterone levels worked up and starting a fight with family.

Besides that, I found a happy biological medium instead of economical.

licorice liquor. Licorice reduces testeosterone serum levels even in some healthy women. (probably ones from that Greek isle or even Lebanon where the drink is favored and flavored)

#### Grant

@9: There's plenty of good music out there now. You just have to go look for it.

@13: Shiner Bock is available in Maryland. It's mediocre at best. Though I'll admit my tastes run to the very expensive and very snobby when it comes to beer.

As for the OP, I think somewhere this doesn't work is with college binge drinking. In my experience those who are always fairly short on spending money (these are usually people whose parents are rich enough to pay for their education but not rich enough to give them lots of spending money who don't work) will drink a lot more quantity of beer when they get a few extra bucks.

ie, they'll get drunk four times a week instead of two if you give them an extra 20 bucks. Anecdotal, of course, but worth thinking about. Of course, college is a very distorted time for drinking habits.

#### Lord

Not sure I wouldn't consider a mansion an increase in quantity, just in size.

Many though, do not double their consumption with income. They invest.

#### Bob

But if your increased spending power comes from increased wages (as opposed to inheritence, etc.) then your opportunity cost of time gets higher. You could think of this as giving you less than 24 hours in a day. So the arguments that the rich can gain more time in the day is confounded by this. Isn't it?

-bob

#### RubyTues

While we are all stuck with the same number of hours in a day, wealth allows you to choose what to do with them. If I had more money I would have a maid and yard service which would certainly buy me more time.

That being said, I'm not convinced that incomes are going up. Maybe at a macro level but I don't think that "we the people" are walking around with more disposable income these days.

#### AG

I drink far less now than when I was a poor college student, but between a job, kids and other life pressures I now savor the few opportunities I do have to have a beer far more... which means I'm willing to spend a bit more on a quality beer even though I drink far less. In fact, the volume difference is so significant that I would estimate my total spending on beer is 10% of what it was when I made far less money.

#### Colin Suttie

"With incomes rising over time..." - I don't have a link, but I'm pretty sure real incomes in the US have stagnated over the last 30 years or so, and that's if you believe the government's inflation figures.

#### caleb

"With incomes rising over time, businesses are smart to bet on the demand for quality rising"

But are incomes rising over time? I'd say in the last 7-8 years real income for anyone but the upper brackets of society, has declined. Most the increased purchasing power over these last few years during the decline, has come from inflated home equity.

#### liberalarts

@5 you have to be careful with the scope of definition for inferior and normal goods. While an increase in your income may move you from a Toyota to a Lexus, a similar increase in income may move another person from a Chevy to a Toyota. So, for you Toyota is inferior while for the other guy it is a normal good. A third person might use an income increase to upgrade from a scooter to a Chevy. For a whole population, you can estimate the impacts for the whole ladder of income/preference types. But even there, each county will have a different aggregate response based on the mix of income types in the country. Incomes rising in the U.S. may push down purchases of window unti air conditioners, while income increases in China may push them up.