Income inequality and price elasticity of market demand: the case of crossing Lorenz curves

Marat Ibragimov,Jun Ma,Rustam Ibragimov,Paul Kattuman

doi:10.1007/s00199-017-1037-0

Abstract

This paper extends Ibragimov and Ibragimov (Econ Theory 32:579–587, 2007) in which the effect of changes income inequality on the price elasticity of market demand is characterized for the class of income distribution changes occurring through non-intersecting Lorenz curve shifts. We derive sufficient conditions for increase/decrease in price elasticity of market demand, under general changes in income distribution, allowing Lorenz curves to intersect as they shift. We conclude by drawing out implications of different types of tax policy changes for demand elasticity.

Highlights

The relationship between income distribution and economic outcomes such as growth and welfare has been an important area in economic research
This paper extends Ibragimov and Ibragimov (Econ Theory 32:579–587, 2007) in which the effect of changes income inequality on the price elasticity of market demand is characterized for the class of income distribution changes occurring through non-intersecting Lorenz curve shifts
We characterized the way in which the price elasticity of market demand changes with income distribution, extending the analysis of Ibragimov and Ibragimov (2007), allowing shifting Lorenz curves to intersect

Summary

Introduction

The relationship between income distribution and economic outcomes such as growth and welfare has been an important area in economic research (see, among others, the discussion in Piketty and Saez 2003; Milanovic 2005, 2011; Atkinson et al 2011). From the policy point of view, it is useful to understand how changes in direct tax schedules work through income distribution and affect market demand elasticity. We address this issue in this paper. We establish sufficient conditions under which price elasticity of market demand increases or decreases under general changes in income distribution, allowing Lorenz curves to intersect as they shift. 3, we extend the Ibragimov and Ibragimov (2007) results, determining sufficient conditions under which market demand elasticity for a consumption good increases or decreases with income distribution changes where Lorenz curves intersect.

Concepts

Price elasticity of market demand and income distribution

Example

Findings

Conclusions