(c) Income Elasticities
Income elasticities of demand are often estimated cross-sectionally from
the behaviour of families or other units with different incomes. When these
units buy in the same market-place it is natural to assume that they face the
same prices of goods. If, however, incomes differ because earnings do,
and cross-sectional income differences are usually dominated by earnings
differences, commodities prices would differ systematically. All commodities prices would be higher to higher-income units because their forgone
earnings would be higher (which means, incidentally, that differences in real
income would be less than those in money income), and the prices of earning intensive commodities would be unusually so.