Price Sensitivity

See: Inelastic Demand. See: Elastic Demand.

Hmmm...you were going to buy that bus ticket, since it’s cheaper than a flight, but it costs more now. Maybe you should see how much the train costs.

Hold up. Let’s dissect what just happened...like an economist. You looked up the price of a bus ticket, and decided it was the best option at the time. But you didn’t buy (for shame, for shame!). Later, you expected the bus ticket price to be the same, but it wasn’t. It went up. This got you thinking about alternatives...substitute goods, if you will.

This is price sensitivity at work. Price sensitivity is how consumers change their behavior in accordance with price changes. Prices go up, and demand goes down...everyone runs away. Too expensive, they say. Prices go down, and everyone flocks...too much demand and not enough supply makes for a dangerous shopping experience. In these cases, there is high price sensitivity.

But it’s not always like that. Sometimes, the price for something will go up, and there will be the same demand, regardless. Economists measure price sensitivity with the price elasticity of demand. A high elasticity means a high price sensitivity; “inelastic” means people aren’t responsive (i.e. sensitive) to changes in prices.

What would you keep buying even if the price went up?