# Proportion of income spent

The last time I checked, a box of matches costs about 70 cents. If I buy four boxes of matches a month, my total spending on matches will be R2,80. An increase in the price of matches to 77 cents, which is a 10% increase, would not make me change my behaviour.

Likewise, a 10% decline in the price of matches would also not make me buy more matches. So my price elasticity for matches is relatively inelastic (it has a value of less than 1).

The reason for this is not that there are no substitutes available (I could, for example, buy a lighter), but because the R2,80 is an insignificant proportion of my income. Whether I spend R2,80 or R3,08 per month on matches is not a big deal for me.

However, if it is about buying something like a new fridge, which costs about R4 500 and is a large proportion of my income, a 10% rise in the price of the fridge would make me reconsider buying it. Whether I spend R4 500 or R4 950 is important to me, and it is to be expected that my price elasticity for a fridge would be fairly elastic (has a value of more than 1).

In general, we can state the following:

The higher the proportion of income spent on a good and service, the more responsive or sensitive the quantity demanded will be to a change in the price. The price elasticity of quantity demanded is therefore higher and more elastic. The lower the proportion of income spent on a good or service, the less responsive or sensitive the quantity demanded will be to a change in price. The price elasticity of the quantity demanded is therefore lower and more inelastic.

But what about Peter's spending on petrol?

Since he does spend a significant proportion of his income on petrol, should his demand for petrol then not be elastic?

In the case of Peter, there are two forces impacting on his elasticity – the unavailability of substitutes and the proportion of income he spends on petrol.

The unavailability of substitutes makes it more inelastic, while the high proportion of his income that he spends on petrol makes it more elastic. In his case, the unavailability of substitutes is the stronger force.

A consequence of this relationship between the proportion of income spent on a good or service, and the price elasticity of the good and service, is that different income groups have different price elasticities for the same good and service. For instance, the price elasticity of bread might be more elastic for a poor household than for a rich household, since poor households spend a larger proportion of their income on bread compared to rich households.

One also finds that the price elasticity of cigarettes is different for teenagers and adults.

Consider the questions below and select the answers you think are most accurate.

What do you think?

### Is the price elasticity of cigarettes higher or lower for teenagers than for adults?

Correct.

Teenagers are more price sensitive since their incomes are more limited than those of adults and, consequently, their price elasticity is higher.

Think again.

Teenagers are more price sensitive since their incomes are more limited than those of adults and, consequently, their price elasticity is higher.

### Are teenagers more price sensitive than adults?

Correct.

If teenagers have a higher price elasticity than adults it means they are more price sensitive.

Think again.

If teenagers have a higher price elasticity than adults it means they are more price sensitive.

### If the government increases the tax on cigarettes, will teenagers be more discouraged than adults to smoke?

Correct.

If teenagers have a higher price elasticity than adults, they will decrease their quantity demanded more, and therefore smoke less if the government increases the tax on cigarettes.

Think again.

If teenagers have a higher price elasticity than adults, they will decrease their quantity demanded more, and therefore smoke less if the government increases the tax on cigarettes.