Examples of Price Elasticity

1. INTRODUCTION:

Price elasticity refers to how much the quantity of a product or service that people buy changes when the price of that product or service changes. It is a measure of how sensitive the demand for a product is to changes in its price. Understanding price elasticity is crucial for businesses and consumers alike, as it helps in making informed decisions about pricing and purchasing.

2. EVERYDAY EXAMPLES:

In daily life, we often encounter scenarios where price elasticity plays a significant role. For instance, consider a student who regularly buys a $2 coffee every morning on the way to school. If the price of the coffee increases to $3, the student might decide to buy coffee only twice a week, reducing their consumption by half. This shows that the student's demand for coffee is elastic, meaning they are sensitive to price changes.

Another example is a family that buys groceries from a local store. If the price of their favorite cereal increases from $3 to $5 per box, they might switch to a cheaper alternative, demonstrating elastic demand. On the other hand, if the price of insulin, a life-saving medication, increases, people who need it will likely continue to buy it regardless of the price, showing inelastic demand.

Additionally, consider a person who buys a monthly public transportation pass for $90. If the price of the pass increases to $120, they might start carpooling or biking to work, reducing their demand for the pass. This also illustrates elastic demand.

3. NOTABLE EXAMPLES:

There are several well-known examples of price elasticity. The tobacco industry, for example, has experienced inelastic demand over the years. Despite significant increases in cigarette prices due to taxes and other factors, many smokers continue to buy cigarettes, albeit perhaps in smaller quantities.

The demand for gasoline is another classic example of inelastic demand. Even when gas prices rise, people who need to commute to work or school will still buy gas, as there are often limited alternatives.

The airline industry is also a notable example. When airlines increase ticket prices, some passengers may choose to fly with a different airline or postpone their travel plans, demonstrating elastic demand. However, for business travelers or those who need to travel for urgent reasons, demand may be inelastic.

4. EDGE CASES:

One unusual example of price elasticity is the demand for luxury goods, such as designer handbags or high-end jewelry. For some consumers, an increase in price may actually increase demand, as the higher price is perceived as a status symbol. This phenomenon is known as the Veblen effect.

Another edge case is the demand for certain types of art or collectibles. For some collectors, the value of a piece of art is not just monetary, but also emotional or historical. As a result, they may be willing to pay a higher price for a piece, even if the price increases significantly.

5. NON-EXAMPLES:

Some people confuse price elasticity with other economic concepts, such as supply and demand or opportunity cost. For instance, the decision to buy a product based on its quality or features is not an example of price elasticity, as it is not directly related to the price of the product.

Another non-example is the decision to buy a product based on its convenience or availability. While these factors may influence purchasing decisions, they are not directly related to price elasticity.

Additionally, the concept of price elasticity should not be confused with the idea of price discrimination, which refers to the practice of charging different prices for the same product or service based on factors such as location or demographics.

6. PATTERN:

All valid examples of price elasticity have one thing in common: they involve a change in price that leads to a change in the quantity demanded. Whether it's a student buying coffee, a family purchasing groceries, or a business traveler flying, the underlying principle is the same. The degree to which the quantity demanded changes in response to a price change is what determines the price elasticity of a product or service. By understanding this pattern, businesses and consumers can make more informed decisions about pricing and purchasing.