Demand elasticity

CFA Level I Economics
#1

According to SchweserNotes Economics - p33,

Factor that affects demand elasticity

"Portion of income spent on a good: The larger the proportion of income that is spent on a good, the more elastic an individual’s demand for that good will be. If the price of a preferred brand of toothpaste increases, a consumer may not change brands or adjust the amount used, preferring to simply pay the extra cost. When housing costs increase, however, a consumer will be much more likely to adjust consumption, because rent is a fairly large proportion of income."

I don’t understand why when higher income spent on a good, the more elastic his demand for that good will be.

Based on my understanding more elastic means the % decrease of quantity demanded for a good is higher than the % increase of price. In other words he will look for subsitutes immediately instead of paying a higher price for it. I don’t understand why does a consumer who is willing to spend a high income on a good will look for subsitutes when there is a price increase? Isn’t it contradicting with “If the price of a preferred brand of toothpaste increases, a consumer may not change brands or adjust the amount used, preferring to simply pay the extra cost”.

My analysis of the paragraph might be wrong. Appreciate your explanations :slight_smile:

#2

It’s a matter of being able to afford it. If your toothpaste goes up 25% ($1.00 a tube to $1.25 a tube), you wouldn’t even notice. If your rent goes up 25%, you might need to move.

#3

Not quite. To say that the demand for A is more (price) elastic than the demand for B simply means that for a 1% price increase in each, the demand for A will drop by a greater percentage than the demand for B; it says nothing about the absolute levels of those drops, only about the relative levels. So A’s demand may drop by 0.5% while B’s drops by only 0.3%, for example.

I prefer using salt as an example instead of toothpaste: if the price of salt tripled, your consumption of salt probably wouldn’t change noticeably; if the price of petrol tripled, your consumption would probably change dramatically.