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

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  • Lorenzo Sabatelli

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.

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  • Lorenzo Sabatelli, 2016. "Relationship between the Uncompensated Price Elasticity and the Income Elasticity of Demand under Conditions of Additive Preferences," PLOS ONE, Public Library of Science, vol. 11(3), pages 1-11, March.
    • Handle: RePEc:plo:pone00:0151390
    DOI: 10.1371/journal.pone.0151390
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    References listed on IDEAS

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    Cited by:

    1. Shawn Berry, 2024. "Is the price right? Reconceptualizing price and income elasticity to anticipate price perception issues," Papers 2402.05152, arXiv.org, revised Feb 2024.

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