Definition
A necessity is a good or service whose consumption by an individual, at a given price, rises less than in proportion to increases in their income. The income elasticity of demand for a necessity is less than one. Necessities are thus goods on which poorer people spend a larger proportion of their incomes than richer people. A necessity is contrasted with a luxury, which is a good or service whose consumption rises more than in proportion to increases in income. See also Engel curve.
Historical Context
The concept of necessity in economics has its roots in the work of early economists such as Ernst Engel, who studied the relationship between income and expenditure in the 19th century. Engel’s work led to the formulation of the Engel Curve, which illustrates how household expenditure on a particular good or service varies with income.
Types/Categories
- Basic Necessities: These are goods and services essential for survival and basic functioning, such as food, water, clothing, and shelter.
- Primary Necessities: These include education, healthcare, and transportation, which are crucial for participating in modern society.
- Conditional Necessities: These depend on individual circumstances, such as childcare services for working parents or specific medicines for those with chronic illnesses.
Key Events
- 1857: Ernst Engel publishes his findings on income and consumption, leading to the Engel Curve.
- Late 20th Century: The concept of income elasticity of demand becomes a cornerstone in economic analysis, distinguishing necessities from luxuries.
Detailed Explanations
Mathematical Formulas/Models
The income elasticity of demand (\( \varepsilon \)) is calculated as:
Charts and Diagrams
Here is a basic representation using Mermaid syntax of the Engel Curve for necessities:
graph LR
A[Income] -->|Increasing| B[Expenditure on Necessity]
B -->|Increases less than proportionately| C
Importance and Applicability
Understanding necessities is crucial for policymakers and businesses to make informed decisions about taxation, subsidies, and pricing strategies. Necessities play a vital role in ensuring equitable access to essential goods and services, particularly for lower-income households.
Examples
- Food: As income rises, people spend more on food, but the proportion of income spent on food decreases.
- Public Transportation: Increased income might lead to spending on alternative modes of transport, but the proportion spent on public transport typically decreases.
- Healthcare: Expenditure on basic healthcare may rise with income, but again, not proportionately.
Considerations
- Cultural Differences: What is considered a necessity can vary significantly between cultures and societies.
- Economic Conditions: During economic downturns, the expenditure patterns on necessities can change as incomes fall.
Related Terms with Definitions
- Luxury: A good or service whose consumption increases more than proportionally with income increases.
- Engel Curve: A graph showing the relationship between income and expenditure on a good or service.
- Income Elasticity of Demand: A measure of how the quantity demanded of a good changes as consumer income changes.
Comparisons
- Necessity vs. Luxury: Necessities have an income elasticity of less than one, while luxuries have an elasticity greater than one.
- Necessity vs. Inferior Goods: Inferior goods see a decrease in demand as income rises, whereas necessities see an increase, but less than proportional to the income rise.
Interesting Facts
- The proportion of income spent on food has historically been used as an indicator of economic development and well-being.
- Housing is a unique necessity as it often behaves more like a luxury due to its varying nature and cost.
Inspirational Stories
Economists like Amartya Sen have highlighted the importance of necessities in ensuring human capabilities and well-being, leading to global initiatives aimed at poverty reduction and improving access to essential services.
Famous Quotes
- Adam Smith: “The necessaries of life occasion the great expense of the poor.”
- Amartya Sen: “Poverty is the deprivation of basic capabilities rather than merely the lack of income.”
Proverbs and Clichés
- “Necessity is the mother of invention.”
- “When the need arises, humans can accomplish anything.”
Expressions, Jargon, and Slang
- Basic Needs: Another term for necessities.
- Staples: Often used to refer to basic food items that are necessities.
FAQs
Q: What is the main difference between a necessity and a luxury? A: The primary difference lies in the income elasticity of demand; necessities have an elasticity of less than one, while luxuries have an elasticity greater than one.
Q: Can a necessity become a luxury over time? A: Yes, with significant changes in economic conditions or technological advancements, what was once a necessity can become a luxury.
References
- Engel, E. (1857). “Die Productions- und Consumptionsverhältnisse des Königreichs Sachsen.”
- Sen, A. (1999). “Development as Freedom.”
- Varian, H. R. (2014). “Intermediate Microeconomics: A Modern Approach.”
Summary
In summary, necessities are essential goods and services characterized by their less-than-proportional increase in consumption relative to income. The concept is integral to understanding economic behaviors, policy-making, and the allocation of resources. By recognizing the importance of necessities, societies can better ensure equitable access to fundamental needs and improve overall well-being.
