A Different Approach to Deriving Price and Income Elasticities: Applications to Telecommunications and Gasoline & Motor Oil

Abstract

The primary purpose of this chapter is to demonstrate how a framework developed from data embodied in surveys of households’ consumer expenditures can be used to calculate complete arrays of own- and cross-price elasticities. The procedure is illustrated for simulated changes of ±10% in the price of telecommunications and for ±50% and −50%/+75% changes in the price of gasoline & motor oil. The engine for the analysis is a matrix of “intra-budget” coefficients that represent the direct relationships amongst the different categories of expenditure in households’ budgets. A strength of the framework is that price changes can be translated immediately into real-income effects, which in turn allows for straightforward separation of income and substitution effects.