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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COMMENTS: 43


  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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  9. misterb says:

    Ok, then how do you explain the loss of quality in mass-market entertainment? Admittedly, I have an elitist point of view, but I think that rock music has deteriorated as its listeners have gotten wealthier. By your argument, since the baby boomers now have less time and more money, they should be more discerning, but instead, they are listening to the same old thing, and any new thing that comes out is unadulterated schlock.
    With as little time as we now have to listen to music, our significantly higher incomes, and all the newest distribution technology, we should be in a golden age of Rock. Instead, we are in the depths of bland and dispirited doldrums. Is bad beer necessary for good Rock?

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  10. Charles says:

    Ahh but Joe it can! Time is relative and can be shrunken or stretched.

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  11. Jordi says:

    Well, isn’t it a fact, or at least a rumor, that in a good market invest in wine, and in a bad market invest in beer? That should tell half the tale right there.

    Oh and comment #9 — bad times make for good rock. See the late 60s and the early 90s, and of course the blues all the time. Without corporations throwing out money, bands are left with practicing in their garage and becoming the next big different thing.

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  12. Ben says:

    @ SJ

    That’s exactly what I was thinking. The weird thing is that I was just taught that things like public transit is an inferior good to owning a car.

    I guess this is where the time thing comes in? Owning two Hondas is impractical, so taking that money and buying a higher quality car is the smarter choice.

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  13. Witty Nickname says:

    I still baffles me why people outside of Texas continue to purchase and consume beer when they do not have access to buy Shiner Bock.

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  14. Colin Suttie says:

    “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.

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  15. caleb says:

    “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.

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  16. liberalarts says:

    @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.

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  17. Steve says:

    I drink “better” beer. Does this make me rich?

    Perhaps by 3rd world standards.

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  18. Grant says:

    @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.

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  19. Lord says:

    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.

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  20. Bob says:

    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

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  21. paulwesterberg says:

    But there is a limit to the value of beer consumed.

    For instance here is a selection of beer drinkers:
    A blue collar worker drinks pabst.
    An average income white collar worker drinks mgd or budwiser select.
    An well paid white collar worker drinks microbrew/imported.
    Company Executive drinks microbrew/imported.
    CEO drinks microbrew/imported.

    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.

    Economists might argue that a Executive or CEO will drink top shelf liqueur or fine wine, but I don’t think they will because I think a beer drinker regardless of income level would prefer a beer and I think there is finite limit to how much a reasonable person will pay for a beer.

    I make above average income, I could afford to buy a bigger house, but I don’t because I don’t need a bigger house, I could buy a nicer car, but I don’t because the car I have works just fine and cars are bad investment. My income increased significantly last year but I didn’t start spending more on beer or anything else.

    I think that the government ought to roll back the bush tax cuts on the wealthy and increase the social security payroll tax limit even though that will directly affect me as long as the increase in government revenues are spent to decrease the deficit and maintain the value of the dollar and not poured into the sand in Iraq.

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  22. jc says:

    Isn’t this whole article just describing normal vs. inferior goods? …not really anything new here.

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  23. Chris S. says:

    Being an amateur brewer and beer nerd (and having friends who are mostly beer nerds and/or beer snobs), I recently decided to test the cost vs. taste for lighter pils and lagers in a double blind taste test.

    Eight beers (for pricey imports, four domestics) ranging $4-12 per six pack bottles were tasted. We limited the tasting to lighter pils and lagers for a narrow style of beer and a wide range in price.

    The results from our tasters (some have served as tasters in beer competitions) was that there was no discernable relationship between price and taste (other than PBR being unanimously voted as most bland).

    However, I observe a near-perfect relationship between a person’s income and what he spends on beer. At a certain income, people seem to look down their noses at Bud while they down a Stella, although the flavor difference between the two is barely detectable. I suppose the aura of sophistication and status is worth about $2 a pint.

    So the title might be more accurate as “The Rich Drink Pricier Beer, Not More.”

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  24. Kaushik Krishnan says:

    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!’

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  25. misterb says:

    @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.

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  26. Thomas B. says:

    “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?

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  27. ricE says:

    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.

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  28. Linus L says:

    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”.

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  29. Ed says:

    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.

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  30. Becky says:

    From the Barenaked Ladies song “If I had a Million Dollars”

    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

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  31. Responsible Consumer says:

    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.

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  32. Reuben says:

    @ 12:
    “Owning two Hondas is impractical, so taking that money and buying a higher quality car is the smarter choice.”

    This may work if you need a luxury car to impress other people (or yourself). However, for a regular, family sized passenger car, it is not a smart choice to spend for a single consumer to spend more than ~25k…

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  33. jeffthecheff says:

    In taste: Pabst Blue Ribbon > Keystone > Bud, miller, coors

    In price: Bud, Miller, coors > Keystone > Pabst Blue Ribbon

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  34. Derick says:

    Of course “quality” is itself produced through marketing and other more subtle measures (as a slew of recent research on perceptions of wine has been showing) — the headline should really read “The Rich Drink More Expensive Beer, Not More.”

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  35. anonymous giver says:

    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)

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  36. Randal says:

    Good beer is one of life’s many pleasures wasted on the young.
    Budweiser et al. are brewed to be as tasteless and inoffensive as possible to the most drinkers; it also makes it easier for somebody’s palate to learn to drink the stuff. They are to beer what factory-produced, skinless boneless chicken breast is to meat.
    I began enjoying beer many years ago, slightly before it was legal to do so, with Olympia Gold. Oly’s slogan was “it’s the water.” Our slogan for Oly Gold (their “lite” product”) was “… and not a whole lot more.”
    Some but certainly not all drinkers acquire a taste for more malt and hops. If we all did, Bud wouldn’t be the largest-selling beer in the world.
    I suspect that if strong ales were cheaper than Bud-like products, the young would drink markedly less because they wouldn’t have access to the cheap “gateway drug” that watery beer represents.

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  37. AG says:

    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.

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  38. Steve says:

    PBR Pfffffffftttttttt!

    Give me a Pigs Ass Porter any day.

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  39. Alex F says:

    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.

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  40. RubyTues says:

    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.

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  41. Mike U says:

    price elasticity of beer

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  42. Christopher Smith says:

    @paulwesterberg: Your comment about a flat tax is a complete non sequitur. Did you intend to argue that this is why consumption tax (e.g., sales tax) won’t work in place of an income tax?

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  43. Xnova says:

    I wish villanova provided an economics professor who was but half as interesting as Prof. Hamermesh

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