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. 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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  2. 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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  3. 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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  4. 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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  5. 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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  6. 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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  7. 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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  8. 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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