Relationship Between Income and Product Demand
Inferior goods (countercyclical) ej < 0 Noncyclical normal goods 0 < ej < 1
Cyclical normal goods ej > 1
Basic foodstuffs, generic products, bus rides Toiletries, movies, liquor, cigarettes Automobiles, housing, vacation travel, capital equipment
MANAGERIAL APPLICATION 5.4
What's in a Name?
When it comes to financial information, privately-held Mars Incorporated, in MacLean, Virginia, is secretive. With annual sales of $15 billion in pet foods, candies, and other food products, the company is also immensely profitable. According to Forbes' annual survey, Forrest Edward Mars, Sr., Edward Mars, Jr., Jacqueline Mars Vogel, John Mars, and the rest of the clan are worth more than $16 billion—one of the richest families in the world. How does Mars do it? That's simple: brand-name advertising.
Like top rivals Hershey's, Nestle, and Ralston Purina, Mars advertises like mad to create durable brand names. Since 1954, M&M's Peanut and M&M's Chocolate Candies have been known by the slogan "Melts in your mouth—not in your hand." With constant reminders, the message has not been lost on consumers who also flock to other Mars candies like Royals Mint Chocolate, Kudos Granola Bars, Skittles Fruit Chews, Snickers Candy & Ice Cream Bars, and Starburst Fruit Chews. Brand-name advertising is also a cornerstone of Mars' marketing of Kal-Kan petfoods; Expert, a superpremium dog and cat food line; and Sheba and Whiskas cat foods.
Mars is like many top-tier consumer products companies; their good name is their most valuable asset. For example, although Coca-Cola enjoys undeniable economies of scale in distribution, nothing is more valuable than its telltale moniker in white on red background. For Philip Morris, the Marlboro brand is the source of a large and growing river of cash flow. In the United States, more than one-half of all cigarettes are sold on the basis of a red and white box and the rugged image of a weather-beaten and sun-dried cowboy. Owners of trademarks such as Astroturf, Coke, Frisbee, Kleenex, Kitty Litter, Styrofoam, Walkman, and Xerox employ a veritable army of lawyers in an endless struggle against "generic" treatment. They know that well-established brand-name products enjoy enormous profits.
See: Suzanne Vranica, "American Express Launches Ads to Boost Brand Hurt by Travel," The Wall Street Journal Online, March 15, 2002 (http://online.wsj.com).
Firms whose demand functions indicate high income elasticities enjoy good growth opportunities in expanding economies. Forecasts of aggregate economic activity figure importantly in their plans. Companies faced with low income elasticities are relatively unaffected by the level of overall business activity. This is desirable from the standpoint that such a business is harmed relatively little by economic downturns. Nevertheless, such a company cannot expect to share fully in a growing economy and might seek to enter industries that provide better growth opportunities.
Income elasticity figures importantly in several key national debates. Agriculture is often depressed because of the low income elasticity for most food products. This has made it difficult for farmers' incomes to keep up with those of urban workers. A somewhat similar problem arises in housing. Improving the housing stock is a primary national goal. If the income elasticity for housing is high and eI > 1, an improvement in the housing stock will be a natural by-product of a prosperous economy. However, if the housing income elasticity eI < 1, a relatively small percentage of additional income will be spent on houses. As a result, housing stock would not improve much over time despite a growing economy and increasing incomes. In the event that ej < 1, direct government investment in public housing or rent and interest subsidies might be necessary to bring about a dramatic increase in the housing stock over time.
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