Income Elasticity of Demand versus Consumption: Implications for Energy Policy Analysis

30 Pages Posted: 2 Oct 2019 Last revised: 10 Jan 2023

See all articles by Hamed Ghoddusi

Hamed Ghoddusi

California State Polytechnic University, San Luis Obispo; Economic Research Forum

Alexander Rodivilov

Stevens Institute of Technology - School of Business

Mandira Roy

Massachusetts Institute of Technology

Date Written: September 14, 2019

Abstract

The income elasticity of consumption depends not only on the demand function but also on the characteristics of the supply function. If the supply of the underlying good (e.g., gasoline, natural gas, or housing) is not completely elastic, the income elasticity of equilibrium consumption will be less than the income elasticity of demand, with the difference depending on the shapes of both the demand and supply functions. We show that if supply is sufficiently inelastic, extending the individual-level estimates of the income elasticity of demand to aggregate values can produce biased estimates with erroneous and misleading policy implications, even if the original elasticity estimate was unbiased. This point is particularly important when extrapolating the impact of national income on aggregate emissions.

Keywords: Supply Elasticity, Demand Elasticity, Income Elasticity, Income-Emission Relationship, Engel Curve

JEL Classification: C23, F15, H77, Q41

Suggested Citation

Ghoddusi, Hamed and Rodivilov, Alexander and Roy, Mandira, Income Elasticity of Demand versus Consumption: Implications for Energy Policy Analysis (September 14, 2019). Available at SSRN: https://ssrn.com/abstract=3453942 or http://dx.doi.org/10.2139/ssrn.3453942

Hamed Ghoddusi (Contact Author)

California State Polytechnic University, San Luis Obispo ( email )

San Luis Obispo, CA 93407
United States

Economic Research Forum ( email )

Cairo
Egypt

Alexander Rodivilov

Stevens Institute of Technology - School of Business ( email )

Hoboken, NJ 07030
United States
2066077479 (Phone)

HOME PAGE: http://rodivilov.weebly.com/

Mandira Roy

Massachusetts Institute of Technology ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

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