Price elastic demand
And price inelastic demand
Introduction
It can be said that different products have different prices and the price of the products depends on the demand or supply. Accordingly, if the demand of the product significantly changes with slightly changes in prices, the product can be considered in the category of elastic with respect to prices. If there is no significant volume changes happened, even if there is a significant price changes, the category can be considered as inelastic.
Primarily, the main goal of this paper is to analyse the determinants on how and why a products can be considered elastic and inelastic, by considering the analysis of two products.
Analysis
Often, businesses know that they encounter demand curves; however, there are only few business who knew what these curves look like. Moreover, the business should also have pertinent idea of what part of the demand curves look like to make strategic and efficient decisions. As mentioned, the degree in which a demand curve reacts to price change is the elasticity of the curve and it various among various products because some products may be more marketable among the target market than the other. It has been noted that products which are necessities are more insensitive to changes in price because consumers would definitely continue to buy them even if their price increases. On one hand, a price increase of a product or service which is considered less of a necessity are more sensitive to price change since consumer may deter on buying them if the price is high.
A product or service is regarded to be highly elastic if minor change in price results to a sharp change in the quantity demanded. Typical, such types of products are easily seen in the market and the consumer may not necessarily require them in their daily living. On one hand, inelastic products are one which in price changes witness modes change in the demanded quantity. Such things are those which are needed by the consumer in their daily life.
For this report, the consideration of beverage and beverages will be given emphasis. As can be seen in the figure below, both the equilibrium quantity and equilibrium price will increase when the demand increases. In the figure, the alcohol products are seen to experience larger change in price but a smaller change in terms of quantity because of the inelastic demand while the beverage market will experience a larger change in terms of quantity and smaller change in price because of the elasticity of the demand. In this figure, it can be said that the consumer spending (price x quantity) increases in both situations, since both of the quantity and price increase.
Figure 1
Comparison of Price Elastic for Beverage
And Inelastic Price of Alcohol drinks
There are three major aspects which can be considered as determinants that influence the elasticity of the price in terms of demand. One of these is the availability of the substitutes. This is perhaps the most essential aspects that influence the elasticity of the product. Generally, the more substitutes the more elastic the demand will become. For instance, if the price of the beverage products went up by went up by .25, consumers can replace their beverage products to different products like water and fresh juices. This indicates that the beverage products are an elastic product since a raise in price will cause a large reduction in the demand as the consumer will start buying substitute product that offer lesser and affordable price. In line with the alcoholic drinks like beer, consumers cannot easily change their products especially those alcohol users. If the price of the alcohol products were to increase, we can see minor change in the consumption of alcohol because there are few substitutes for alcohol drinks. And there are people who are not willing to give up their alcohol drinking, specifically the brand that they always buy no matter what the price. In this regard, it can be concluded that alcohol drinks is an inelastic product due to the lack of lack of substitutes. In this regard, while the product within the industry served to be elastic because of the substitute’s availability, the industry itself tends to become inelastic. it can be said that unique products like diamonds are inelastic or gasoline and petroleum because they have few or no substitutes.
Aside from this, another determinant is the amount income available to spend on the good of the consumers. Herein, the aspect that affects demand elasticity or inelasticity referred to the totality of the individuals who can spend on specific products or services Hence, if the price of beverage products such as soft drinks goes up from .50 to and the income of the people remains same, the income which is available to spend on soft drink or beverage products, which is , is now enough for consuming and buying two rather than four cans or bottles of the soft drinks. It goes to say that the consumer is being forced to decrease their consumption and demand for these products. hence, if there is an increase price and there is no change in the income of the people and consumers to spend on these products, we can see some elastic reaction in demand. It can be said that the demand will be price sensitive if there is no change in the income of the people.
The last determinant is the context of time. Accordingly, if the price of the alcoholic drinks goes up per pack, an alcoholic user with very few available substitutes will still consider buying the drinks for consuming. This indicates that alcoholic drinks tend to be inelastic since the changes in price do not have significantly relative effect on the quantity demanded. Nonetheless, if the alcoholic users find that he or she cannot afford to spend more for the alcoholic drinks the user tends to drink less often and the price elasticity of alcoholic drinks for specific consumer becomes elastic eventually.
It can be concluded that the needs of the consumers must always be satisfied and consumers have the right to avail whatever products they want. However, the people will only buy specific goods in specific quantities at specific prices; hence if the price changes, the quantity demanded tends to change as well and that’s how price elasticity of demand and inelasticity of demand are seen.
Reference
Lau, E. 2008. What is meant by price elasticity of demand? How can we measure the elasticity of demand? Why is an understanding of elasticity of demand important to both business firms and the government? Online available at http://www.nointrigue.com/docs/notes/economics/eco_y11priceelas.pdf retrieve January 8, 2009.
Credit:ivythesis.typepad.com
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