Question

If the income elasticity of tomatoes is estimated to approximate \(+0.25\), what would you expect to happen to the consumption of tomatoes as personal income rises?

Short answer

As personal income rises, the consumption of tomatoes is expected to increase, but at a rate less than the increase in income, due to a low income elasticity of +0.25.

Step-by-step solution

Understanding Income Elasticity of Demand

Income elasticity of demand measures how the quantity demanded of a good responds to a change in consumers' income. It is calculated as the percentage change in quantity demanded divided by the percentage change in income. When the income elasticity of demand for a good is positive, the good is considered a normal good, meaning that its demand increases as consumer income rises.

Interpreting the Given Income Elasticity

A positive income elasticity of +0.25 means that tomatoes are a normal good. However, since the value is less than 1, tomatoes are considered to be a necessity good, which means the quantity demanded will increase less than proportionately with an increase in income.

Predicting the Effect of Rising Income on Consumption

With an income elasticity of +0.25, as personal income rises, one would expect the consumption of tomatoes to increase. However, the increase in consumption will be modest, as consumers do not increase their tomato purchases greatly with increases in their income.

Key concepts

Normal Goods

When we delve into the world of consumer behavior, normal goods play a pivotal role in illustrating how purchasing patterns change with economic status. A normal good is something that individuals buy more of as their income increases. In contrast to inferior goods, whose demand decreases as consumer incomes rise, normal goods are associated with positive income elasticity.

Take, for example, organic vegetables or brand-name clothing; as people earn more, they often choose these higher-quality items over their less expensive counterparts. This is not just about quality, though. it's about how individuals prioritize their spending. As incomes go up, so does the quantity demanded for these normal goods, reflecting financial ability and preference for superior products.

Necessity Goods

Closely connected to the discussion of normal goods are necessity goods. These items are essential for day-to-day living, such as basic food items, water, and housing. They are characterized by a lower income elasticity of demand, which means that while the consumption of these goods increases with income, it does so at a slower rate.

Imagine daily staples, like rice or bread; even as consumers become wealthier, they only consume slightly more of these products, if at all, because there's a limit to how much of these goods they actually need. Thus, necessity goods reflect a more stable demand. Even in the context of the exercise, tomatoes, with their elasticity of +0.25, are a necessity good and represent this trait of inelastic demand with respect to income.

Quantity Demanded

At the heart of economic transactions is the concept of quantity demanded, which is the amount of a product that consumers are willing and able to purchase at a given price. It's a snapshot of consumer desire and financial capability meeting at a specific point in time.

In a realistic marketplace, the quantity demanded for a product fluctuates based on several factors including price, consumer income, and preferences. A good's income elasticity informs us about one aspect of this complex behavior. If we increase the income of consumers, we typically observe a change in the quantity demanded for various goods, shedding light on how essential or luxurious a product is perceived.

Consumer Income

Consumer income is the fuel that powers the engine of the market. It's the total amount of money that households earn, which in turn determines their spending capacity. Essentially, the more money consumers have, the more they can afford to spend on goods and services. However, not all goods are affected equally by changes in consumer income.

As income rises, consumers tend to allocate funds differently, often favoring the purchase of more normal goods and services over necessities, which they can already afford. It's important to notice though, that spending patterns vary greatly among different income brackets and cultures, making consumer income a critical variable in assessing market dynamics.