This study resource brings together updated short videos for students covering price elasticity of demand.
In this revision video we cover the key factors that influence the coefficient of price elasticity of demand.
In this video we will look at a handful of examples of products and ask whether demand from consumers is likely to be price elastic or price inelastic?
1. Number of close substitutes – the more substitutes there are in the market, the more price elastic is demand because consumers can easily switch. E.g. Air travel and train travel are weak substitutes for inter-continental flights but are closer substitutes for journeys between major cities.
2. Cost of switching between products – there may be expense involved in switching. In this case, demand tends to be inelastic. For example, mobile phone service providers or gyms may require a contract which has the effect of locking-in some consumers once a purchase has been made.
3. Degree of necessity or whether the good is a luxury – necessities tend to have a price inelastic demand whereas luxuries tend to have a more price elastic demand. An example of a necessity is rare-earth metals that are an essential raw material in the manufacture of solar cells and batteries.
4. Proportion of a consumer’s income allocated to spending on the good – products that take up a high percentage of income will have a more price elastic demand.
5. Time period allowed following a price change – demand is more price elastic, the longer that consumers have to respond to a price change. They have extra time to search for relatively cheaper substitutes in the market.
6. Whether the product is subject to habitual consumption – consumers become less sensitive to the price of the good of they buy something out of habit (it has become their default choice).
7. Peak and off-peak demand - demand tends to be price inelastic at peak times and more elastic at off-peak times – this is the case for transport services including rail, airlines and taxi companies such as Uber and Lyft.
8. Breadth of definition of a good or service – if a good is broadly defined, i.e. the demand for petrol or meat, demand is often price inelastic. Individual brands of petrol or beef are likely to be price elastic.
9. Method of payment - people tend to notice price changes more when they pay in cash rather than card, or direct debit.
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