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Importance in Household Budgets

3 March, 2015 - 10:51

One reason price changes affect quantity demanded is that they change how much a consumer can buy;a change in the price of a good or service affects the purchasing power of a consumer’s income andthus affects the amount of a good the consumer will buy. This effect is stronger when a good or service is important in a typical household’s budget. A

A change in the price of jeans, for example, is probably more important in your budget than achange in the price of pencils. Suppose the prices of both were to double. You had planned to buy four pairs of jeans this year, but now you might decide to make do with two new pairs. A change in pencilprices, in contrast, might lead to very little reduction in quantity demanded simply because pencils are not likely to loom large in household budgets. The greater the importance of an item in household budgets, the greater the absolute value of the price elasticity of demand is likely to be.