So you might think my last post was mostly explaining what income elasticity of demand is. And you’d be right! But it was also about a little more than that. Society, as a whole, has an income elasticity of demand, in which increased prosperity brings greater increases in consumption in some areas than in others. But individuals and households also have an income elasticity of demand, and those are not the same for every individual and household. More importantly, there is an important question as to whether those elasticities are evenly distributed. The underlying question is whether changes in underlying distributions of income would lead to changes in prices. I believe they would, and it is clear that in a sufficiently small market that they would. The question is whether in large, complex, modern, monetary markets that they would, and that is less clear. It’s simply the question I’ve been chewing on.

All this to say – here’s the Excel spreadsheet I used to model the economy in the prior post. It’s fun to play with, if playing with these kinds of models is your thing. Just adjust the income/production in cells A2-C2, then use Solver to solve for cell D4 (the Solver presets should be loaded).

Supply & Demand Apples & Wheat Income Elasticity of Demand

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