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.

Leave A Comment

Comments are moderated and generally will be posted if they are on-topic and not abusive.

 

COMMENTS: 43

View All Comments »
  1. 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?

    Thumb up 0 Thumb down 0
  2. Charles says:

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

    Thumb up 0 Thumb down 0
  3. 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.

    Thumb up 0 Thumb down 0
  4. 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.

    Thumb up 0 Thumb down 0
  5. 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.

    Thumb up 0 Thumb down 0
  6. 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.

    Thumb up 0 Thumb down 0
  7. 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.

    Thumb up 0 Thumb down 0
  8. 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.

    Thumb up 0 Thumb down 0