Now that you’ve had some practice calculating the value of elasticity, let’s turn to some of the factors that play a role in whether a product is likely to have elastic or inelastic demand. The following factors can have an effect on elasticity:
- Substitutes: If it’s easy to choose a different product when prices change, the demand will be more elastic. If there are few or no alternatives, demand will be more inelastic.
- Absolute price: When a product is very expensive, even a small percentage change in price will make it prohibitively expensive to more buyers. If the price of a product is a tiny percentage of the buyer’s overall spending power, then a change in price will have less impact.
- Importance of use: In our previous example, we examined the elasticity of demand for cookies. A buyer may enjoy a cookie, but it doesn’t fulfill a critical need the way a snow shovel after a blizzard or a life-saving drug does. In general, the more important the product’s use, the more inelastic the demand will be.
- Competitive dynamics: Goods that are produced by a monopoly generally have inelastic demand, while products that exist in a competitive marketplace have elastic demand. This is because a competitive marketplace will create more options for the buyer.
With these considerations in mind, take a moment to see if you can figure out which of the following products have elastic demand and which have inelastic demand. It may be helpful to remember that when the buyer is insensitive to price, demand is inelastic.
Gasoline (Generic Need)
The demand for gasoline generally is fairly inelastic. Car travel requires gasoline. The substitutes for car travel offer less convenience and control. Much car travel is necessary for people to move between activities and cannot be reduced to save money.
Gas from a Specific Station
The demand for gasoline from any single gas station, or chain of gas stations, is highly elastic. Buyers can choose between comparable products based on price. There are often many stations in a small geographic area that are equally convenient.
Generally an instructor assigns a textbook to the student, and the student who wants access to the learning materials must buy it, regardless of the price. Because the student can’t easily identify another textbook or resource that will ensure the same content and grade for the class, he has no substitutes and must buy the book at any price. Thus the demand is inelastic.
New Textbook Distribution Channels
Increasingly, students have new options to buy the same textbooks from different distribution channels at different price points. The introduction of new distribution channels is increasing options for buyers and having an impact on the price elasticity for publishers.
Specialty Coffee Drinks
Many coffee shops have developed branded drinks and specialized experiences in order to reduce substitutes and build customer loyalty. While black coffee is available almost universally, there are few substitutes for a Starbucks Java Chip Frappuccino. Demand for such products is more inelastic.
Coffee is generally widely available at a level of quality that meets the needs of most buyers. The combination of a low price, relative to the buyer’s spending power, and the fact that the product is sold by many different suppliers in a competitive market make the demand highly elastic.
Only Taylor Swift can offer a Taylor Swift concert. She holds a monopoly on the creation and delivery of that experience. There is no substitute, and loyal fans are willing to pay for the experience. Because it is a scarce resource and the delivery is tightly controlled by a single provider, access to concerts has inelastic demand.
Airline tickets are sold in a fiercely competitive market. Buyers can easily compare prices, and buyers experience the services provided by competitors as being very similar. Buyers can often choose not to travel it the cost is too high, or to substitute travel by car or train. This makes the demand elastic.
Essential medical procedures have inelastic demand. The patient will pay what she can or what she must. In Canada most health services are paid for by the government. But elsewhere in the world, like the USA, people pay for health care services. In general, products that significantly affect health and well-being have inelastic demand.
Soft drinks and many other nonessential items have highly elastic demand. There is competition among every brand and type of soda, and there are many substitutes for the entire category of soft drinks.