Recession and Income Elasticity Economics Mr. Joshi

Income Elasticity of Demand If incomes do down by 10%, would demand for goods go up or down? Would demand go down less than 10%, 10%, or more than 10% Income Elasticity of Demand % Demand for a Good = ------------------- % Income For most goods, demand will fall when incomes fall, but the question is by what percent?

Substitutability a factor here? 2 General Factors Degree of Necessity: Is it a luxury or a necessity? Degree of Budget Importance: Is it a large or small part of a person’s budget? Why isn’t Degree of Substitutability a factor here?

As more people lose their jobs and others fear than they might lose theirs in the near future…the spending habits of nearly everyone changes. Economists look at the “income effect” on consumer demand to describe this change. In other words, as incomes go down, which businesses will be hit the most? The least? It all depends on income Elasticity!

Let’s try some thought experiments… If incomes fell by 10%, would demand for the following goods drop by less than 10% or more than 10%? International Air Travel Starbucks Coffee Soap Subway Sandwiches Fast Food Diapers New Cars Pencils Used Cars Frozen Dinners Canned Food Instant Noodles Public Bus Gift Wrap Gym Memberships Casino What patterns in your responses do you see?

Necessity or Not? Car Landline Phone Clothes Dryer Item Yes/No For You % respondents “Yes”? Car Landline Phone Clothes Dryer Home Air Conditioning TV Personal Computer Cell Phone Microwave High-Speed Internet Cable/Satellite TV Dishwasher Flat-Screen TV iPod

How Necessary are these conveniences? The Pew Research Center's Social & Demographic Trends survey on the effects of the recession was conducted by landline and cell phone April 2-8, 2009, among a nationally representative sample of 1,003 adults ages 18 or older.

What might be the economic impact of this sentiment?

What might be the economic impact of this sentiment?

How Income Inelastic is Demand for these services? Computers / IT / Web Development Criminal Justice/ Police / Security Education Energy Environment Health Care & Medicine International Business Psychology / Counseling / Substance Abuse Treatment State and Federal Government

Recession Bust Businesses: These are income elastic! RVs Cruises & Vacations Luxury Anything – Boats, Cars, Homes Fancy Restaurants Construction & Real Estate Casinos Concerts & Sports Games Elective Surgery Education – Private school & College County Club Memberships Beef Do you or your family work in these areas? How's it going?

Retail Sales – Income Elasticities

Other Retail Stores (Down) Abercrombie & Fitch Down 30% Neiman Marcus Down 24.2% Bergdorf Goodman Down 24% Nordstrom Down 15.4% Zumiez Down 13.4% Dillard’s Down 13% Stein Mart Down 12.2% Gap Down 12% J.C. Penney Down 8.8% Bon-Ton Down 8.5% American Eagle Down 7% Limited Down 7%

Other Retail Stores (Up) Aeropostale Up 11% Buckle Up 21% Hot Topic Up 10.8% BJ’s Up 8%

Auto Industry: Engine of the Economy Car companies generate huge numbers of jobs: High-paying factory jobs High-paying supplier and parts industry jobs Jobs for dealerships, truckers, mechanics,etc. Jobs generated by greater incomes in towns with auto plants Do you think Income Elasticities are the same for all cars?

Test your car sales knowledge… As of April 2008: What do you think were the top 5 best-selling vehicles?

How income elastic is the demand for cars?