Evidence of elasticity in a recession

Here is some terrific evidence of income elasticity of demand, substitute goods and the increase in demand for inferior goods in a recession – sales of baked beans and supermarket ‘own brands’ rose by over 20% in April compared with the same month a year ago, while sales of organic products, which might be considered ‘normal luxury’ goods, fell by over ten percent. Consumers are switching away from the pricier organic ranges to lower priced products. If we take the change in income as minus 4% (the figures in this BBC chart show that GDP has fallen by almost 4% over the last year) then it is possible to work out the income elasticity of demand for those products as minus 5 for the baked beans and own brands, and plus 2.5 for the organic goods – all quite significantly income elastic.

There is evidence of price elasticity in action as well – sales of flat screen TV’s are up by 17.5%, but the prices are down by more than 20%, so that the total revenue earned from those higher sales is actually lower than it was a year ago. Perhaps demand is less responsive to changes in price than retailers hoped, as the percentage change in demand is lower than the percentage change in price, indicating that demand is price inelatic. What does this mean for the manufacturers and retailers? That will depend on whether the lower prices are caused by lower costs, so that their profit margins are retained, or by discounting the price to the consumer in order to increase the volume of sales at the expense of profit margin.