Homothetic preferences is a subset of preferences used in economics

Economics

Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...

 when analyzing the demand for consumption

Consumption (economics)

Consumption is a common concept in economics, and gives rise to derived concepts such as consumer debt. Generally, consumption is defined in part by comparison to production. But the precise definition can vary because different schools of economists define production quite differently...

 of various goods and services

Goods and services

In economics, economic output is divided into physical goods and intangible services. Consumption of goods and services is assumed to produce utility. It is often used when referring to a Goods and Services Tax....

.

In mathematics, a function of two or more arguments is homothetic if all ratios of its first partial derivatives depend only on the ratios of the arguments, not their levels (see: homothetic transformation). In economics, a model with competitive consumers or producers optimizing subject to homothetic utility or production functions, will imply that ratios of goods demanded depend only on relative prices, not on income or scale.

Intratemporally homothetic preferences

This assumption on individual preferences assures that decision makers with different incomes but facing the same prices will demand goods in the same proportions.

Intertemporally homothetic preferences

Models of modern macroeconomics and public finance often assume the constant-relative-risk-aversion form for within period utility (also called the power or isoelastic form). The reason is that, in combination with additivity over time, this gives homothetic intertemporal preferences and this homotheticity is of considerable analytic convenience (for example, it allows for the analysis of steady states in growth models). These assumptions imply that the elasticity of intertemporal substitution

Elasticity of intertemporal substitution

Elasticity of intertemporal substitution is a measure of responsiveness of the growth rate of consumption to the real interest rate...

, and its inverse, fluctuation (risk) aversion

Risk aversion

Risk aversion is a concept in psychology, economics, and finance, based on the behavior of humans while exposed to uncertainty....

, are constant: rich and poor decision makers are equally averse to proportional fluctuations in consumption. This may have significant implications, for example when evaluating the costs of business cycles

Welfare cost of business cycles

In macroeconomics, the welfare cost of business cycles refers to the decrease in social welfare, if any, caused by business cycle fluctuations....

or evaluating a policy change in a dynamic general equilibrium model with heterogeneous agents.