What does the proportion of income spent on a good affect?

The proportion of income spent on a good affects its price elasticity of demand because it influences how sensitive consumers are to changes in price. When a larger portion of income is allocated to a particular good, consumers are typically more responsive to price changes for that good. This is because spending a significant amount on a product makes consumers more likely to consider substitutes or reduce their consumption when prices rise.

For example, if a person spends a large fraction of their income on a particular good, a small increase in its price may lead them to seek alternatives or forego that good altogether, indicating a higher price elasticity of demand. Conversely, if a good takes up a small portion of income, consumers might be less sensitive to price changes and continue to purchase it even if prices rise, reflecting lower price elasticity of demand. Hence, the relationship between the fraction of income spent on a good directly ties to consumer behavior in response to price adjustments.