What affects the elasticity of demand?
Availability of substitutes
If substitutes are available, demand will be more elastic.
EX: You like fresh green beans, but the price has increased. Your demand will be more
elastic because you can buy frozen or canned green beans.
If substitutes are NOT available, demand will be more inelastic.
EX: You have a medication that you need and there is no generic version. Even if the price goes
up, you will still buy it. Therefore, your demand will be relatively inelastic.
Budget Amount Spent on Item
If the price is a relatively small part of your budget, even if the price increases dramatically, your
demand will be relatively inelastic.
EX: Salt costs $.50 per box. Even if the price of salt rises 100% to $1.00 a box, will that affect
how much you buy? Therefore, demand for salt is relatively inelastic.
If the price of a good is a big part of your budget, an increase in price may make you
dramatically drop how much you buy. Therefore, people tend to have elastic demand for more
expensive products.
Necessity vs. Luxury
If the item is a necessity, demand will be relatively inelastic. (This can include addictions.)
If the item is a luxury, demand will be relatively elastic, since you can easily walk away from it.
Changes over Time
In the short run, people can’t adapt their behavior much, so demand may be more inelastic.
In the long run, people can change their behavior, making demand more elastic.
Example: In the 1990s, gas was cheap! People bought HUGE, gas-guzzling SUVs. When gas
prices began to rise in the 2000s, people could not adapt their behavior much at first. They still
had to drive their Suburbans to work. Therefore, in the short run, demand for gasoline was
more inelastic. Over time, people began to buy more fuel-efficient vehicles. This made
demand for gasoline more elastic.
Practice: Would the demand for the following items be relatively more elastic or inelastic? Give
your rationale.
1. Deodorant:
2. Secret Deodorant:
3. Toilet Paper:
4. North Face Jackets:
5. Internet Access