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. Steve says:

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

    Perhaps by 3rd world standards.

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  2. 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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  3. 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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  4. 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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  5. 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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  6. jc says:

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

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  7. 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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  8. 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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