1. Recession and Income Elasticity
Economics Mr. Joshi

2. 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?

3. 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?

4. 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!

6. 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?

7. 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

8. 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.

9. What might be the economic impact of this sentiment?

11. What might be the economic impact of this sentiment?

12. 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

13. 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?

14. Retail Sales – Income Elasticities

15. 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%

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

17. 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?

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

19. How income elastic is the demand for cars?