To accumulate individual consumptions

When calculating the inflation rate, the goods and services contained in the market basket for CPI calculation are common goods and services; therefore, when the demands for these goods and services increase, the prices will increase. However, different goods and services have different elasticities of demand, so I do not see a way to find a general equation to model all the goods and services’ demand according to our income changes by accumulating individual specific demands for different goods and services.

However, as the goods and services contained in the CPI are almost necessities to everyone. When the necessities do have a ceiling of the demand, up to a certain level, the demand for the necessities does not increase significantly despite the increase in people’s incomes. Therefore, we are possible to find a model to model the general elasticity of the demand for the combination of these goods and services in the CPI basket, and once we find the elasticity of the demand, we are able to model the general demand for the goods and services in the entire economy.

The problem here is that it may not be able to accurately model the price changes in the entire economy, as this model needs all individual data or at least a randomly selected sample. Moreover, in the CPI basket, different goods and services have different weights, this adds more complication in our model. In addition, when we consider the inflation rate in the economy, we need to consider multiple factors and different economies and people have different demands for different goods and services. In some wealthy economies, people no longer need necessities, they have better substitues for the necessities, for example, they consume better meat and food. Under such circumstance, not only the quantities change but also the types of goods and services change when people’s incomes change.

Therefore, modelling a general demand for the combination of necessities is a way to model individual elasticities of demand in general, but it is not a very accurate way to do so.