What this lesson teaches
I can explain what makes demand elastic or inelastic.
Syllabus K343, 2.6.3. Determinants of PED: main influences on whether demand is elastic or inelastic
Make a guess
The price of all petrol rises 10%. Next, only one petrol brand raises its price 10%. When do drivers cut back more?
- When all petrol rises, because the rise affects each driver at once.
- Both the same, because petrol is a necessity.
- When one brand raises it, since rival brands are substitutes.
Show the answer
When one brand raises it, since rival brands are substitutes.
Drivers simply fill up at another brand's station. When all petrol is dearer, there is no easy substitute, so demand is inelastic.
Demand is more elastic when there are close substitutes, the good takes a large share of income, or buyers have time to adjust.
Number and closeness of substitutes: this is the most important influence. If a good has close substitutes, buyers switch easily when its price rises, so demand is elastic. A single brand of cola has elastic demand. Medicine with no alternative has inelastic demand.
Proportion of income spent on the good: a price rise for something cheap, such as salt, barely affects buyers, so demand is inelastic. A price rise for a car or a holiday takes a big bite from income, so demand is more elastic.
Necessity or luxury: necessities such as basic food and electricity tend to have inelastic demand. Habit-forming goods, such as cigarettes, are also inelastic.
Time: demand becomes more elastic over time as buyers find substitutes. How the market is defined matters too. Demand for one brand of petrol is far more elastic than demand for petrol in general.
Sort these
Elastic or inelastic? Decide for each good.
Groups: Elastic demand, Inelastic demand.
- Electricity for a home
- Cigarettes for a regular smoker
- Air tickets for a holiday booked months ahead
- One brand of cola at a supermarket
- Petrol for a taxi driver this month
- A new car
Show the answer
Elastic demand
- Air tickets for a holiday booked months ahead Buyers have time to compare airlines and dates, so they respond strongly to price.
- One brand of cola at a supermarket Many other colas sit beside it, so buyers switch as soon as its price rises.
- A new car A car takes a large share of income, so a price rise makes buyers delay or choose something cheaper.
Inelastic demand
- Electricity for a home Electricity is a necessity with no close substitute, so households keep using it when the price rises.
- Cigarettes for a regular smoker Habit-forming goods are bought even at higher prices, so quantity barely changes.
- Petrol for a taxi driver this month In the short run the driver has no other fuel and must keep working, so demand is inelastic.
- Substitutes
- More and closer substitutes make demand more elastic.
- Share of income
- Larger share of income makes demand more elastic.
- Necessity or habit
- Makes demand more inelastic.
- Time
- Demand is more elastic in the long run.
Worked example: Explaining why demand for petrol is inelastic
A question asks why a rise in petrol prices barely reduces how much drivers buy.
- Few close substitutes in the short run: most cars run only on petrol.
- Necessity: many people need to drive to work or for deliveries.
- Time: switching to an electric car or changing jobs takes time, so demand is more elastic in the long run.
- Conclusion: quantity demanded falls by a smaller percentage than the price rises.
Watch out for this
Goods that are expensive always have elastic demand.
What matters is the share of the buyer's income and whether substitutes exist. Some expensive goods, such as essential surgery, have inelastic demand.
Check your understanding
Which good is most likely to have price elastic demand?
- Tap water supplied to homes by the national water agency
- One particular brand of bottled water
- Salt, which most households buy every few months
Show the answer
One particular brand of bottled water
Right. Many other brands are close substitutes, so buyers switch easily.