Why is the demand for some goods inelastic while the

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Unformatted text preview: ians’ services) is inelastic, while the demand for other goods (oysters, restaurant meals, and cars) is elastic. Why is the demand for some goods inelastic, while the demand for other goods is elastic? Four factors affect the elasticity of demand: (1) the number of substitutes available, (2) whether something is a luxury or a necessity, (3) the percentage of income spent on the good, and (4) time. Number of Substitutes Let’s look at two goods: heart medicine and soft drinks. Heart medicine has relatively few substitutes; many people must have it to stay well. Even if the price of heart medicine went up by 50, 100, or 150 percent, the quantity that people demanded probably would not fall by much. Is the demand for heart medicine more likely to be elastic or inelastic? The answer is inelastic. Do you see the reasoning here? The fewer substitutes for a good, the less likely the quantity demanded will change much if the price rises. inelastic demand The type of demand that exists when the percentage change in quantity demanded is less than the percentage change in price. unit-elastic demand The type of demand that exists when the percentage change in quantity demanded is the same as the percentage change in price. Section 3 Elasticity of Demand 103 04 (086-109) EMC Chap 04 11/17/05 4:37 PM Page 104 Demand for Oil In recent years, China’s demand for oil has been rising. Two reasons: First, about 2.5 million cars are added to China’s roads every year. Second, the industrial demand for oil has been rising because China’s economy has been rapidly growing. As China’s demand for oil rises, what will happen to the world demand for oil? Although you won’t study the topic of price until a later chapter, what do you think China’s rising demand for oil will do to the price for gasoline you pay at the pump? ECONOMIC THINKING In contrast, a particular soft drink (say Sprite) has many substitutes (Fresca, Mountain Dew, etc.). Therefore, if the price of Sprite rises, we would expect the quanity demanded to fall greatly, because people have many other soft drinks they can choose. Is the demand for a particular soft drink more likely to be elastic or inelastic? The answer is elastic, because the more substitutes there are for a good, the more likely people will buy a lot fewer of the item if the price rises. Luxuries Versus Necessities Luxury goods (luxuries) are goods that people feel they do not need to survive. For example, a $70,000 car would be a luxury good for most people. Necessary goods (necessities), in contrast, are goods that people feel they need to survive. Heart medicine may be a necessity for some people. Food is a necessity for everyone. Generally speaking, if the price of a necessity, such as food, increases, people cannot cut back much on the quantity demanded. (They need a certain amount of food to live.) However, if the price of a luxury good increases, people are more able to cut back on the quantity demanded. Between the two types of goods, luxuries and necessities, the demand for luxuries tends to be elastic; the demand for necessities is more likely to be inelastic. 104 Chapter 4 Demand Percentage of Income Spent on the Good Claire has a monthly income of $2,000. Of this amount, she spends $10 on magazines and $400 on dinners at restaurants. In percentage terms, she spends one-half of 1 percent of her monthly income on magazines and 20 percent of her monthly income on dinners at restaurants. Suppose the price of magazines and the price of dinners at restaurants both double. What will Claire be more likely to cut back on, the number of magazines she buys or the number of dinners at restaurants? She will probably reduce the number of dinners at restaurants, don’t you think? Claire will feel this price change more strongly because it affects a larger percentage of her income. She may shrug off a doubling in the price of magazines, on which she spends only one-half of 1 percent of her income, but she is less likely to shrug off a doubling in the price of dinners at restaurants, on which she spends 20 percent. In short, buyers are more responsive to price changes for goods on which they spend a larger percentage of their income. In these cases, the demand is likely to be elastic. Whereas, the demand for goods on which consumers spend a small percentage of their income is more likely to be inelastic. Time As time passes, buyers have greater opportunities to change quantity demanded in response to a price change. If the price of electricity went up today and you knew about it, you probably would not change your consumption of electricity much today. By three months from today, though, you would probably have changed it more. As time passes, you have more chances to change your consumption by finding substitutes (natural gas), changing your lifestyle (buying more blankets and turning down the thermostat at night), and similar actions. The less time you have to respond to a price change in a good, the more likely it is that your demand for that good is going to be inelastic. 04 (086-109) EMC Chap 04 11/17/05 4:37 PM Page 105 An Imp...
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This document was uploaded on 01/16/2014.

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