Necessities

Definition

Necessities are basic goods or services that are essential for survival and wellbeing, such as food, water, clothing, and shelter. In economic terms, necessities typically have a low income elasticity of demand, meaning that as consumers' income increases, the proportion of their income spent on these goods does not significantly change. Understanding necessities helps in analyzing consumer behavior and how it responds to changes in income and prices.

5 Must Know Facts For Your Next Test

1. Necessities usually have an income elasticity of demand that is less than one, indicating they are not significantly affected by changes in income levels.
2. Consumers tend to allocate a smaller portion of their budget to necessities as their income rises, while spending more on luxury goods.
3. The demand for necessities remains relatively stable regardless of economic fluctuations, making them less sensitive to price changes compared to luxury items.
4. When prices for necessities increase, consumers may seek substitutes, but they are still likely to continue purchasing essential items.
5. Understanding the concept of necessities is crucial for businesses when making pricing decisions and anticipating consumer reactions to economic changes.

Review Questions

• How does the concept of necessities relate to income elasticity of demand?
  • Necessities have a low income elasticity of demand, typically less than one. This means that as consumer incomes rise, the quantity demanded for these goods doesn't increase as significantly as it does for luxury goods. Since necessities are essential for survival, consumers will prioritize spending on them even if their income increases, leading to a relatively stable demand.
• What impact do changes in the prices of necessities have on consumer behavior compared to luxury goods?
  • Changes in the prices of necessities tend to have a smaller effect on consumer behavior compared to luxury goods. When the price of necessities rises, consumers may reduce consumption or switch to cheaper alternatives; however, they are unlikely to stop purchasing these essential items altogether. In contrast, luxury goods see more significant fluctuations in demand based on price changes since they are not required for survival.
• Evaluate the implications of classifying goods as necessities on market strategies and economic policy.
  • Classifying goods as necessities has important implications for market strategies and economic policy. Businesses must consider that demand for necessities will remain relatively stable even in economic downturns, allowing for consistent revenue streams. Policymakers might implement subsidies or price controls on essential goods to protect consumers from price hikes and ensure accessibility. Furthermore, understanding how consumers respond to income changes can inform targeted policies that promote welfare and economic stability.

Related terms

Income Elasticity of Demand: A measure that shows how the quantity demanded of a good changes in response to a change in consumer income.

Luxury Goods: Products that are not essential and whose demand increases more than proportionately as consumer income rises.

Cross-Price Elasticity of Demand: A measure of how the quantity demanded of one good responds to a change in the price of another good.