Question

(1) Which of the following two goods has a lower price elasticity of demand value: Salt or Gasoline?

(2) The rationale for your answer by considering the totality of factors (there are at least three factors) that will impact the price elasticity of demand of each of the two goods. Explain

Answer 1

1. Among salt and gasoline, salt has a lower elasticity of demand i.e salt is more inelastic than gasoline.

2. We made the judgement based on three factors:

i. availibility of substitutes: Salt has no close substitutes available whereas people can substitute gasoline with LPG, CNG etc. Hence, when price of gasoline increases, people can switch to other substitutes. But in case of salt, even if price of salt increases, people will still have to buy salt because it is a necessity. Hence, salt has relatively inelastic demand.

ii. Share of income spent on goods: When income of consumers increase, then they can switch to other cars such as electric cars, hybrid cars etc but even if consumer's income increases, then also consumer will spend the fixed portion on salt. Hence the proportion of income spent on salt remains unchanged. Hence salt has more inelastic demand than gasoline.

iii. Price level: When the price of salt increases significantly, then consumers will still buy salt because without it cooking will be impossible. But on the other hand, when price of gasoline increases significantly, consumer may react by not using cars for sometime or buy switching to some other alternatives. Hence here also the absolute value of price elasticity of demand for salt is relatively smaller than the absolute value of the price elasticity of demand for gasoline.