Ripped From the Headlines Kaitlin Smith 20 September 2016

Overview “Rising Incomes Juice Consumer Spending” Wall Street Journal, 13 September 2016 For the middle class, income increased 5.2% between 2014 and 2015 WSJ expects that most of the people earning more income will spend more money

Income Elasticity of Demand EDI = % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑖𝑛𝑐𝑜𝑚𝑒 = Δ𝑄𝐷 + 5.2% “Middle-class oriented retailers” sell normal goods Increased spending on normal goods indicates that Δ𝑄𝐷 is positive 0 < EDI ≤ 1 so 0 < Δ𝑄𝐷 ≤ 5.2%

Outward Shift in Demand Curve Price Greater demand at all prices D1 D2 Quantity

How can retailers use this information? Expect overall sales to increase up to 5.2% Look at income elasticities of specific products to forecast quantity demanded