Relationship between the Uncompensated Price Elasticity and the Income Elasticity of Demand under Conditions of Additive Preferences

PLoS One. 2016 Mar 21;11(3):e0151390. doi: 10.1371/journal.pone.0151390. eCollection 2016.

Abstract

Income and price elasticity of demand quantify the responsiveness of markets to changes in income and in prices, respectively. Under the assumptions of utility maximization and preference independence (additive preferences), mathematical relationships between income elasticity values and the uncompensated own and cross price elasticity of demand are here derived using the differential approach to demand analysis. Key parameters are: the elasticity of the marginal utility of income, and the average budget share. The proposed method can be used to forecast the direct and indirect impact of price changes and of financial instruments of policy using available estimates of the income elasticity of demand.

Publication types

  • Research Support, Non-U.S. Gov't

MeSH terms

  • Choice Behavior*
  • Commerce / economics*
  • Computer Simulation
  • Income*
  • Uncertainty

Grants and funding

This study was partly funded by GLOBMOD (GLOB MOD SL), a research and information technology company operating in the for-profit and not-for-profit health-economic and market research sectors. The funder provided support in the form of salary for the author [LS], but did not have any additional role in the study design, data collection and analysis, decision to publish or preparation of the manuscript. The author received no additional funding, from any other source, for this work.