Question

. 1. What are the forces that determine why some Demand curves are ‘elastic’ while others are ‘inelastic’? 2. Why is the Demand curve for gasoline considered to be ‘inelastic’ while the Demand curve for one type of ‘typical’ new car is considered to be ‘elastic’? 3. Is the Demand curve for coffee price inelastic? Or price elastic? Why? Please apply the forces discussed in question #1 to your analysis. 4. Do the same analysis for the Demand for a typical loaf of bread, a $50 per person meal, and a pack of cigarettes.

Answer 1

1.

Factors that determine price elasticity of demand:

Nature of commodity:

Elasticity of demand of a commodity is influenced by its nature. When a commodity is a necessity like food grains, vegetables, medicines, etc., its demand is generally inelastic.

Availability of substitutes:

Demand for a commodity with large number of substitutes will be more elastic. The reason is that even a small rise in its prices will make the buyers to go for its substitutes. For example, a rise in the price of Pepsi encourages buyers to buy Coke and vice-versa.

Time period: Demand is inelastic in short period but elastic in long period. This is because consumers can make change in the longer period than in the shorter period. If price of gasoline goes up, then consumers can find alternative fuel in the long run and this is not possible in the short run.

Income level.

If a consumer has high income, then the demand for products would be inelastic as the consumer can afford to buy even if the price increases.

2,

Gasoline is a necessity; and has inelastic demand.

New car is a luxury and demand is elastic.

3. Coffee is elastic as it has number of substitutes like tea.