Define price elasticity of demand and suggest why different goods have different price elasticities.
Price elasticity of demand is the extent to which the quantity that is demanded of a product fluctuates with changes in the price of that product. Graphically speaking, it is represented by the slope of the demand curve. A product’s demand is said to be more price elastic if a change in price results in a large change in quantity demanded. A product’s demand is less price elastic (more inelastic) if a change in price results in a small change in quantity demanded.
In general, when prices rise, quantity demanded falls. But this does not happen at the same rate for all products. For some products, a change in price does not result in much of a change in quantity demanded. Let us examine a few reasons why this would be.
- Lack of substitutes. If there are no substitutes for a good, you are more likely to keep buying it if the price rises.
- Inability to delay purchase. If the good is something that you have to have (medicine, for example) you will be more likely to buy it even if the price rises.
- The good is cheap compared to your budget. If something costs only a very small amount, you will be less likely to care if the price goes up.
These are the major causes of differences in price elasticity of demand.