On the price and income elasticity of consumption in EU economies

Abstract

Although the marketing literature is abundant with studies dealing with the responsiveness of consumption to price changes, not much has been said about the elasticity of household expenditures from a macroeconomic perspective. Focusing on several categories of non-durable and semi-durable goods, we provide a pan-European comparative analysis of both price and income elasticities of demand. Income elasticities consistently dominate the price ones, regardless of the chosen consumption category. Although we explicitly allow for time-variability of elasticities via a state space model, our results show that the demand elasticities are independent of the business cycle, both across states and across the considered consumption categories. Consumption trajectories obviously exhibit some secular tendencies and are insensitive to transitory shocks.