Wealth effect
The wealth effect is the change in spending that accompanies a change in perceived wealth.[1] Usually the wealth effect is positive: spending changes in the same direction as perceived wealth.
Effect on individuals
Changes in a
Demand for some goods (called inferior goods) decreases with increasing wealth. For example, consider consumption of cheap fast food versus steak. As someone becomes wealthier, their demand for cheap fast food is likely to decrease, and their demand for more expensive steak may increase.
Consumption may be tied to relative wealth. Particularly when supply is highly inelastic, or when the seller is a monopoly, one's ability to purchase a good may be highly related to one's relative wealth in the economy. Consider for example the cost of real estate in a city with high average wealth (for example New York or London), in comparison to a city with a low average wealth. Supply is fairly inelastic, so if a
However, according to
Economist Dean Baker disagrees and says that “housing wealth effect” is well-known and is a standard part of economic theory and modeling, and that economists expect households to consume based on their wealth. He cites approvingly research done by Carroll and Zhou that estimates that households increase their annual consumption by 6 cents for every additional dollar of home equity.[3]
In macroeconomics
In
See also
- Income effect
- Income elasticity of demand
- Money illusion
- Ricardian equivalence
- Wealth (economics)
- Wealth elasticity of demand
References
- The New Palgrave: A Dictionary of Economics, v. 4, pp. 883–4.
• Jelveh, Zubin. "In Praise of the Wealth Effect – Economics Blog – Zubin Jelveh – Odd Numbers – Portfolio.com". portfolio.com. Retrieved 2009-04-20. - ^ a b Flavelle, Christopher (2008-06-10). "Debunking the "Wealth Effect": Declining house prices don't necessarily slow down consumer spending". Slate.
- ISBN 978-0-615-53349-0