What this lesson teaches
I can use price elasticities of demand and supply to judge how large those changes will be.
Syllabus 8843, 2.1.2(g). Demand and Supply Analysis and its Applications: These outcomes can be affected by price elasticities of demand and supply
Make a guess
Which has more price-elastic demand: one brand of bottled water at a 7-Eleven, or drinking water in general?
- The single brand, because it has many close substitutes.
- They are the same, because the product is identical.
- Drinking water in general, because people buy it each and every day.
Show the answer
The single brand, because it has many close substitutes.
If one brand raises its price, buyers simply pick another brand on the same shelf. Water in general has no substitute, so demand for it is inelastic.
Demand is more elastic with close substitutes, a big share of income, luxuries and more time.
Availability of close substitutes is the most important factor. If one brand of bubble tea raises its price, buyers switch to the shop next door, so demand for that brand is elastic.
Proportion of income: when a good takes a big share of your budget, like a holiday, a price rise hurts more, so demand is more elastic. A 10% rise in the price of salt barely matters.
Necessity and habit: necessities and addictive goods, such as medicine or cigarettes, have inelastic demand.
Time: over a longer period, people find alternatives. Demand for petrol is inelastic this week, but more elastic over years as people change cars or move closer to an MRT station.
Sort these
Is demand for each good likely to be price elastic or price inelastic?
Groups: Price elastic, Price inelastic.
- One fast-food chain's beef burger
- A holiday package to Japan
- One brand of bottled green tea at a convenience store
- Table salt
- Petrol this week
- A prescription medicine with no alternative
Show the answer
Price elastic
- One fast-food chain's beef burger Other chains sell similar burgers nearby, so many buyers switch when this one's price rises.
- A holiday package to Japan A holiday takes a large share of income, so a price rise bites and buyers look for cheaper trips.
- One brand of bottled green tea at a convenience store Other brands sit on the same shelf, so buyers switch as soon as this one costs more.
Price inelastic
- Table salt Salt takes a tiny share of income and has no close substitute, so a price rise barely changes how much people buy.
- Petrol this week In the short run drivers cannot change cars or routes, so quantity barely falls when the price rises.
- A prescription medicine with no alternative It is a necessity with no substitute, so patients keep buying it at a higher price.
- Substitutes
- More and closer substitutes: more elastic.
- Share of income
- Bigger share: more elastic.
- Necessity, habit
- More inelastic.
- Time
- Longer period: more elastic.
Worked example: One drink brand versus drinking water
Compare demand for one brand of bottled drink at a convenience store with demand for drinking water on a hike with no other water source.
- The drink brand has many close substitutes on the same shelf, so its demand is price elastic.
- Water on the hike has no substitute and is a necessity, so demand is very price inelastic.
- How the market is defined matters: demand for 'drinks' as a whole is less elastic than demand for one brand.
Watch out for this
Demand for all food is inelastic because food is a necessity.
Food as a whole is a necessity, but a particular brand or dish has many substitutes. Demand for one hawker stall's chicken rice is quite elastic.
Check your understanding
Which good is likely to have the most price elastic demand?
- One particular brand of instant noodles.
- Electricity for a household, used for lights, cooking and cooling.
- Insulin, which a diabetic patient buys in large amounts.
Show the answer
One particular brand of instant noodles.
Right. There are many close substitutes, so buyers switch easily when its price rises.