Using the Determinants of Consumer Responsiveness to Determine Price Elasticity of Demand for ECO-201 Milestone Two

There are five determinants that we can use to determine whether the demand for your product is likely to be elastic or inelastic. You should cover at least two or three of the following characteristics to receive a score of proficient (or all five to receive an exemplary) and apply them to your product to support your determination of elastic or inelastic demand. Here is an example of the application of these determinants to gasoline, as we previously covered in a discussion board assignment.

The availability of close substitutes to the good: Thinking back to module two, we learned that substitutes are goods and services that can be used for the same purpose.  If consumers have few options for substitutes, as in the case of gasoline, when the price rises the quantity demanded only falls slightly.  If few substitutes are available, the demand for the good tends to be more inelastic.  The demand for a good with many substitutes tends to be more elastic.

The passage of time: In general, the more time that passes, the more elastic the demand for a product becomes.  If the price of gas goes up one day, most people are still going to drive to work, the store, and to any other planned activities.  If the price of gas stays high, eventually people will start making adjustments that could include: carpooling, taking public transportation, purchasing a more fuel efficient vehicle, or finding a job closer to where they live.   

Luxuries vs Necessities: Goods that are luxuries usually have more elastic demand than goods that are considered to be necessities.  Gasoline is considered to be a necessity for many people, which supports the inelastic demand for gas.

The definition of the market: As a general rule, the more narrowly we define a market, the more elastic the demand will be.  If you are stopping to fill up your car and you notice that the gas station across the street is 3 cents cheaper, you’ll probably visit the station across the street, making the demand for gas at one particular gas station elastic.  But, at the end of the day the only thing you can put in your tank is gasoline, so your overall demand for gas is inelastic.

Share of a good in a consumer’s budget: In general, the demand for a good will be more elastic the larger the share of the good in the average consumer’s budget.  This is where the gasoline example gets tricky, because for many people gas makes up a sizeable portion of their budget.  This is why we need to look at multiple determinants when we are trying to determine the elasticity of demand for a product, especially if you don’t have the data to calculate it.  In the case of your final project (and Milestone Two), you might not have enough information to calculate the elasticity of demand for your product, so you’ll have to use several of these determinants to decide whether your firm faces an elastic or inelastic demand curve.