Price Elasticity of Demand
There are some goods, however, that have relatively static demand curves. In particular, some goods remain in constant demand regardless of changes in the price. Demand for these goods is called inelastic. (If the demand for a good is sensitive to price changes, it is called elastic.) A handful of factors influence the price elasticity of demand of a particular good: its importance, the availability of substitutes, and the percentage of our income that it costs us.
If a good is essential and we cannot do without it, demand for the good will remain constant regardless of changes in price. Medicine and milk are basic necessities; we will buy them even if the price rises. We will also continue to buy products if there is no substitute or alternative for that product. We can’t substitute water for gasoline; face power is white but it is no substitute for salt. And if a good is cheap, we will buy it even if its price rises. We would spring for a box of matches, even if the price jumped from 79 cents to $1.25.
But even many goods with inelastic demand can acquire greater elasticity over time. If a product’s price remains high for some time, some people will learn to live without it. Gasoline demand is relatively inelastic in the short term. But when high prices persist, people develop alternative transportation strategies—they car pool, buy smaller cars, move closer to their jobs, and ride public transportation.
So let’s review the essentials. The law of demand tells us what we all know—that when prices go up demand goes down and when prices go down demand goes up. Demand measures the amount of a good or service that people are willing and able to buy at a specified price. And a demand curve plots the size of demand at various prices. Several factors influence demand: diminishing marginal utility, income, substitution goods, complementary goods, and tastes or preferences. And the more that a price change influences our willingness and ability to buy a product, the more elastic is that product’s demand.
Factors that Increase Demand, Shifting Curve to the Right:
- Increased income
- Increase in price of substitution goods
- Decrease in price of complementary goods
- Changing consumer tastes
Factors that Decrease Demand, Shifting Curve to the Left:
- Decreased income
- Decrease in price of substitution goods
- Increase in price of complementary goods
- Changing consumer tastes
Why It Matters Today
Remember our delicious and entertaining complementary goods, baseball tickets and hot dogs?
Turns out that sales in baseball tickets and Dodger Dogs don't track each other perfectly. Since the economy went into decline a couple years back, prices for baseball tickets have held steady or even increased. But attendances haven't fallen too dramatically. Ballpark hot dog sales, though, have fallen off sharply.
What does that mean? It means that hot dogs have greater price elasticity than baseball tickets. People still want to go to the ballgame, even if tickets become more expensive relative to incomes. But they're willing to forego the extra five or ten bucks they might have spent on an overpriced hot dog once they're inside.
Ballpark concession owners from coast to coast must be crying into their $12 "souvenir cup" beers.
Sometimes, a Song Says it Better: Glamorous, by Fergie
In “Glamorous,” Fergie explains she has relatively price insensitive (inelastic) travel and tacos.