Price elasticity of demand is a measure of the responsiveness of the quantity demanded of a good or service to a change in its price. It is calculated as the percentage change in the quantity demanded of a good or service divided by the percentage change in its price.
There are several factors that can influence the price elasticity of demand for a good or service:
- The availability of substitutes: If there are many substitutes available for a particular good or service, the demand for it is likely to be more elastic, as consumers can easily switch to a substitute if the price of the original good or service increases.
- The proportion of income spent on the good or service: If a good or service represents a large proportion of a consumer’s budget, the demand for it is likely to be more elastic. For example, the demand for luxury goods is often more elastic than the demand for necessities, as consumers are more willing to reduce their consumption of luxury goods if the price increases.
- The time period being considered: The price elasticity of demand tends to be higher in the long run than in the short run. This is because consumers have more time to adjust their consumption patterns and find substitutes in the long run.
Here are some examples of goods or services with different levels of price elasticity of demand:
Elastic demand:
- Consumer electronics: There are many substitutes available for consumer electronics, such as smartphones, tablets, and laptops, and consumers may be willing to switch to a different brand or model if the price of their preferred product increases.
- Travel: Consumers may have a range of options for their travel plans, such as different modes of transportation or destinations, and may be willing to adjust their plans if the price of travel increases.
- Restaurant meals: There are many substitutes available for restaurant meals, such as home-cooked meals or meals from other restaurants, and consumers may be willing to switch to a different option if the price of a particular restaurant’s meals increases.
Inelastic demand:
- Prescription drugs: Many prescription drugs do not have readily available substitutes, and consumers may not have the option to reduce their consumption if the price increases.
- Electricity: Electricity is an essential service that consumers have a relatively constant need for, and they may not have many alternatives if the price increases.
- Petrol/diesel/gasoline is necessary for transportation for many consumers, and they may not have many alternatives if the price increases.
