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October 22, 2007

Defining necessities

What do economists consider necessities? N.C. State University's Mike Walden says their definition isn't much different from the way the term is used in everyday language. Listen

"I think most people have the notion that well a necessity is something they just need to have. And it doesn't matter what the price is, they have to buy it," says Dr. Walden, a professor of agricultural and resource economics. "And actually that's pretty close to the way economists define a necessity.

"How we define it is that we look at how people react in their purchases of a product when the price changes. And if, for example, when the price of gas goes up and people reduce their gas purchases just a little bit -- they essentially buy the same numbers of gallons that they were when the price was lower -- then we call that product a necessity.

"On the other hand," he adds, "if we look at say the purchase of luxury cars and what we typically find -- pick any model of a luxury car -- that when the price goes up a lot you will see a major drop in the purchase of that luxury car. Then we say that luxury car is not a necessity.

"So the things we think of as necessities –- gas, food, clothing, housing -– they are necessities, again, because people don't respond very much in their purchases to changes in price. So this gets beyond just saying necessity is something that we want to call a necessity. It really gives us a specific way of defining that very important concept."

Posted by deeshore at October 22, 2007 08:00 AM