Overview
This lecture explains the main factors that determine whether the demand for a product is elastic or inelastic, with practical examples.
Determinants of Demand Elasticity
- The availability of close substitutes makes demand more elastic (e.g., many types of Cheerios).
- Demand is more inelastic when there are few or no close substitutes (e.g., gasoline).
- Necessities tend to have inelastic demand because people need to buy them regardless of price changes (e.g., toothpaste, milk).
- Non-necessities or luxury items have more elastic demand; people can skip buying them if prices rise (e.g., cotton candy, cookies).
Market Definition and Elasticity
- Narrowly defined markets (specific products or brands) usually have more elastic demand due to more substitutes (e.g., apple cinnamon Cheerios).
- Broadly defined markets (general categories) have more inelastic demand due to fewer substitutes (e.g., all breakfast cereals).
- As the definition shifts from narrow (many substitutes) to broad (few substitutes), demand becomes less elastic.
Share of Budget
- Products that take a large share of a consumer's budget have more elastic demand; price increases cause people to change behavior (e.g., cell phone bill).
- Products that take a small share of the budget have inelastic demand; price changes are less noticeable (e.g., table salt).
Real-World Examples
- Highly elastic: Tide detergent (many substitutes), raisin bran (many cereal options).
- Moderately elastic: Grapes (can choose other fruits if price rises).
- Inelastic: Bread (necessity in broad category), cigarettes, gasoline (few substitutes, seen as necessities).
Key Terms & Definitions
- Elastic Demand — When quantity demanded changes significantly with price changes.
- Inelastic Demand — When quantity demanded changes little as price changes.
- Substitutes — Other goods that can replace a product.
- Necessities — Goods required for daily living; people buy them regardless of price.
- Market Definition — How specifically or broadly a product is categorized in analysis.
Action Items / Next Steps
- Review textbook for determinants of elasticity, focusing on substitutes, necessity, market definition, and budget share.
- Prepare for examples and calculation problems on elasticity for the next class.