Suppose you attend a meeting at work to discuss whether to change the price of your product. You think demand is elastic, but a colleague thinks it is inelastic. Does it matter whether demand is...
Suppose you attend a meeting at work to discuss whether to change the price of your product. You think demand is elastic, but a colleague thinks it is inelastic. Does it matter whether demand is elastic or not? Explain. Is it possible that you are both right?
Yes, it does matter whether demand is elastic or not when discussing price. After all, the whole point of inelasticity is that the demand exists irrespective of price because the product is considered a necessity rather than a luxury. Now, that doesn’t mean that both arguments lack merit. Certain products, and gasoline is a perfect example, can meet the definition of both an elastic and an inelastic good. Increases in the cost of fuel “hurt” all consumers, because people are highly dependent upon their automobiles for basic transportation. Consequently, in theory, gasoline would be considered an inelastic good. And, that is partly correct. What makes it partly incorrect, however, is the history of decreases, sometimes substantial, in the demand for gasoline resulting from increases in price. The reason? People respond to higher gasoline prices by eliminating road trips they would otherwise take for vacations and weekend outings. And they purchase more fuel-efficient automobiles. This reduction in demand can, in turn, result in a decrease in fuel prices as suppliers try to recapture market share.
Even health care can be both elastic and inelastic depending upon the nature of the medical procedures being discussed. Life-threatening injuries and illnesses are generally inelastic; for example, chemotherapy or surgery have to occur irrespective of price or the patient will die. (For purposes of discussion, we’ll ignore the very real possibility of people dying for lack of adequate financial resources, including medical insurance) On the other hand, people are less likely to visit urgent care centers or their primary care physician for non-life-threatening illnesses if copayments and deductibles breach a certain ceiling. Additionally, demand for cosmetic and other non-essential surgical procedures decreases when affordability becomes a more important variable in a consumer’s decision-making process.
There are additional variables involved in discussions of elasticity, including the potential for product substitution and determinations of whether price fluctuations associated with seasonal demand are relevant. The range of goods and services that are absolutely essential for human survival, after all, is fairly limited to basic shelter, food and clothing. Beyond those basics, definitions of inelasticity become increasingly precarious. Whether to purchase the latest technology television with the wider screen hardly constitutes inelastic demand given the fact that eschewing ownership of a television is always an option, let alone keeping the existing model for another year or two. The perceived need for a larger house to accommodate a growing family, similarly, reflects cultural values more than stark economic realities.
Demand and supply curves do respond to price changes. How much is a product of the elasticity of the good or service in question. Defining “elastic” and “inelastic” is more complex than sometimes assumed for the reasons mentioned above. Even food is elastic when one considers the quantity of packaged foods that fall off the nutritional chart and the demand for which plummets if the price of such non-essential groceries increases too much. How much is “too much,” however, is the question that allows for the most intense debate within the confines of the hypothetical business meeting alluded to in the question.