Octane Economics
01/17/2013 | | fixed money baskets, Gasoline, Graphs and Laughs, Graphsandlaughs, income elasticity, price elasticity
Because households irrationally assign fixed amounts to budget categories such as clothes or food, price changes within a category can result in bizarre behavior; case in point, gasoline. Seems a rise in gas prices (which reduces purchasing power) causes households to shift from high-grade gasoline to low-grade gasoline 20 times more than when purchasing power falls by an equal amount from sources other than gas, such as higher schooling costs.