Question

Identify and describe two markets of your choosing; the first characterized by an elastic demand and the second one by an inelastic demand. Indicate why your choices have the relative elasticities they do. In addition to your personal reasons for the purchase, you will need to apply the determinants of elasticity to sort why your choices in Market One are elastic and why the choices in Market Two are inelastic.

Market One: What are some of the goods you purchase in your life for which your demand is most elastic? Why?

Market Two: What are some of the goods you purchase in your life for which your demand is highly inelastic? Why?

Answer 1

Answer

Price is one of the most important determinants of demand. The price elasticity of demand is the responsiveness of quantity demand with respect to the price change.

Price elasticity of demand (E_d) = Percentage change in the quantity demand / Percentage change in price

Or, E_d = (Q/Q) / (P/P) , where '' stands for change.

The price elasticity of demand depends on many factors , like, the availability of substitute goods, Necessity of the commodity, length of time, complementarity of the goods, nature and uses of the goods, percentage share of income spent on commodity, consumer's like and preferences for commodities, etc.

Availability of substitute goods : higher the availability of substitute goods, higher will be the elasticity of demand, or more elastic will be the demand curve.

Necessity of the commodity : Higher the necessity of a good, lower will be the price elasticity of demand, or inelastic demand,like medicine or necessary drug,,salt, etc. These goods are not only necessary, but have no close substitutes. Lower the necessity of a good, like luxury good, higher will be the price elasticity of demand, or elastic demand.

Length of time : Longer the time period, more will be the availability of substitute goods, and more will be the elasticity of demand.

Complementarity of the goods : Some goods are complement to each other.These goods are consumed and used jointly. Like brake fluid for automobile, gasoline,salt for food taste, etc.Higher the complementarity of goods, less will be the elasticity of demand, or inelastic demand.

Nature and uses of the goods : Some goods are used for more than one purpose , like electricity. The higher the number of uses of a good, higher will be its price elasticity of demand , i.e., elastic demand. For a small change in price, there is a large change in the demand for the good.

Percentage share of income spent on commodity : Lower the percentage of income spent on a commodity, lower will be the responsiveness of consumer's demand for that commodity when price of the commodity rises. In this case the price elasticity of demand is inelastic. So lower the percentage of income spent on a commodity,lower the price elasticity of demand, and vice versa.

Consumer's like and preferences for commodities : Sometimes consumers become habituated to something. They like some specific branded goods, or some specific foods,drinks, etc. In this case the change in price of the commodity that the consumer likes, won't have any significant effect on the demand for that commodity.So in this case, the price elasticity of demand is very low, or demand is inelastic.

Market One : Some of the goods in my life, whose elasticity of demand is most elastic, are Coffee,electricity,

Coffee: I like coffee but I have no fascination over it. In absence of coffee, I drink tea also. Recently, the price of coffee is gradually rising. So I plan instead of coffee, I should now drink tea. Tea is a close substitute of coffee.

Electricity: The price per unit of electricity has increased in few months back.Now I'am consuming less of electricity now. Most of the time now, I do not use AC , that I used a lot before.

Figure 1- Elastic demand curve

Market Two:Some of the goods in my life, whose elasticity of demand is highly inelastic, are : Rice, branded butter, petrol , salt.

Rice: I like rice.Few months back, its price per kg. has risen, but I consume it now as much as before.

Branded butter : There are several butter available in the market. But I like a specific branded butter.Though its price has rises, I consume it the amount I need.There is no difference in consumption.

Petrol: Without petrol,I can not drive my car. Petrol price is gradually rising.But what can I do? I just use my car now five days a week instead of six days earlier.My petrol consumption has been declined now but very little.

Figure -2 Inelastic demand curve