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Impact of Income on Price and Income Responses in the Differential Demand System

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  • Brown, Mark G.

Abstract

An extension of the differential demand system model is developed that allows the demand system’s income and price responses to vary with income level. The model’s income flexibility and marginal propensities to consume (MPCs) out of income are made functions of real income measured by the Divisia volume index. The income flexibility is a factor of proportionality underlying all price effects and a change in this term impacts the sensitivity of all demands to prices. Price effects are also made a function of the MPCs using a uniform substitute specification. The model was used to analyze the conditional demands for a group of beverages. The findings indicate that changes in conditional total beverage expenditures result in various income and price elasticity changes across individual beverage products.

Suggested Citation

  • Brown, Mark G., 2006. "Impact of Income on Price and Income Responses in the Differential Demand System," Research papers 36836, Florida Department of Citrus.
    • Handle: RePEc:ags:fdcrrp:36836
    DOI: 10.22004/ag.econ.36836
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    References listed on IDEAS

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    1. Mark G. Brown, 1993. "Demand Systems for Competing Commodities: An Application of the Uniform Substitute Hypothesis," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 15(3), pages 577-589.
    2. BARTEN, Anton P., 1977. "The systems of consumer demand functions approach: A review," LIDAM Reprints CORE 284, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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    4. Barten, A. P., 1969. "Maximum likelihood estimation of a complete system of demand equations," European Economic Review, Elsevier, vol. 1(1), pages 7-73.
    5. Brown, Mark G. & Lee, Jonq-Ying, 2002. "Restrictions on the Effects of Preference Variables in the Rotterdam Model," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 34(1), pages 17-26, April.
    6. Bouis, Howarth E., 1996. "A food demand system based on demand for characteristics: If there is 'curvature' in the Slutsky matrix, what do the curves look like and why?," Journal of Development Economics, Elsevier, vol. 51(2), pages 239-266, December.
    7. Brown, Mark G. & Behr, Robert M. & Lee, Jonq-Ying, 1994. "Conditional Demand And Endogeneity? A Case Study Of Demand For Juice Products," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 19(1), pages 1-12, July.
    8. Brown, Mark G. & Lee, Jonq-Ying, 2000. "A Uniform Substitute Demand Model With Varying Coefficients," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 32(1), pages 1-10, April.
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    10. Barten, Anton P, 1993. "Consumer Allocation Models: Choice of Functional Form," Empirical Economics, Springer, vol. 18(1), pages 129-158.
    11. Barnett, William A., 1984. "On the flexibility of the Rotterdam model : A first empirical look," European Economic Review, Elsevier, vol. 24(3), pages 285-289, April.
    12. Brown, Mark G. & Lee, Jonq-Ying, 2002. "Restrictions On The Effects Of Preference Variables In The Rotterdam Model," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 34(1), pages 1-10, April.
    13. Mountain, Dean C, 1988. "The Rotterdam Model: An Approximation in Variable Space," Econometrica, Econometric Society, vol. 56(2), pages 477-484, March.
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