Heinz soup. These days there are many alternatives to Heinz soup. If price rises, people will switch to less expensive varieties. Shell petrol. We say that petrol is overall inelastic. But, if an individual petrol station increases price, people will buy from other petrol stations. The only exception is if a petrol station has a local monopoly – e.g. at service station on the motorway there is a captive audience. But, in a city centre with many alternatives, people will have an elastic demand.

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Tesco bread.

Tesco bread will be highly price elastic because there are many better alternatives. If the price of Tesco bread rises, consumers will switch to alternatives. Daily Express. If the Daily express increases in price, there are similar newspapers people will switch to. For example, the Daily Mail or Daily Mirror. If it was a newspaper like the Financial Times of the Economist, demand would be more inelastic, as there is no close substitute to the Financial Times. Aero chocolate bar. If Aeros increase, people will switch to alternative types of chocolate bar. Porsche sports car. If a Porsche increases, demand will probably be elastic because it is a high % of income, and so the higher price will put people off. Also, there are other alternatives, such as Jaguar or Aston Martin. However, this is a little less clear cut. Some car enthusiasts may want to buy a Porsche whatever the price.

2. Price Inelastic Demand (% ΔQd < % ΔP)
ϵ < 1
If the value of price elasticity coefficient is less than one in absolute value. This means that a percentage in quantity demanded is less than the percentage change in price

Goods which are inelastic tend to have some or all of the following features: They have few or no close substitutes, e.g. petrol, cigarettes.

Graph:

e.g. if price of petrol falls (100p to 70p) 30%, but demand for petrol only increases (200 to 220) 10% the Price Elasticity Demand = /-0.33/ = 0.33

Petrol – petrol has few alternatives because people with a car,

Page 2 Classification of Price Elasticity of Demand Essay

need to buy petrol. For many driving is a necessity. There are weak substitutes, such as train, walking and the bus. But, generally, if the price of petrol goes up, demand proves very inelastic. Salt. If the price of salt increased, demand would largely be unchanged. It is only a small % of income and people tend to buy infrequently. It is a good with no real substitutes at all. Good produced by a monopoly. Any good produced by a monopoly is likely to be inelastic demand. For example, if Sky increase the cost of premiership pay per view, many football fans will pay the extra price. Though because it isn’t a necessity, demand may be less inelastic than say petrol. Tap water. For householders, tap water is a necessity, with no alternatives. If the water company increase the cost of water bills, people would keep buying the service. It would have to rise to a very high price before people disconnected their water supply.

This is why tap water is regulated. Diamonds. Bought very infrequently, diamonds are the ultimate luxury with few exact alternatives. You could buy other precious gems, but others may not have the same allure as diamonds. A cut in price wouldn’t increase demand very much. Peak rail tickets. For commuters who rely on the train to get to work in London, demand will be very inelastic. If price of fares from Surbiton to London increase, demand will only fall by a small amount. The alternatives for commuting into London, such as driving are limited. Apple iPhones, iPads. The Apple brand is so strong that many consumers will pay a premium for apple products. If the price rises for apple iPhone, many will continue to buy. If it was a less well known brand like Dell computers, you would expect demand to be price elastic.

3. Unitary Elastic Demand (% ΔQd = % ΔP)
ϵ < 1
If the value of elasticity coefficient is equal to

1. This means that a change in price is equal to a change in quantity demanded.

Graph:

The parabola shape means that, wherever you are on the curve, a given percentage change in the price of the good will result in an identical percentage change in the quantity demanded.

ϵ = ∞
If the elasticity coefficient equals infinity. This means that without change in price, an infinite change occurs in quantity demanded

Graph:

an infinitesimally small drop in price (so small that you can’t see it on the diagram) has caused an infinite rise in demand (the horizontal demand curve goes on forever). Then you can just about see that the horizontal demand curve represents infinite (or perfect) elasticity. This horizontal demand curve is associated with firms in perfectly competitive markets

Example:
Foreign currency exchange. If you are buying foreign currency, it is likely to exhibit the features of perfect competition. A buyer could choose from many different sellers. The product (e.g. dollars) is identical. Perfect information about cheapest would be easy to find. Therefore, if one firm increased the price of dollars, above market equilibrium – no one would buy from that firm. They would buy from cheaper alternatives.

ϵ = 0
If the elasticity coefficient equals zero. This means that any change in price creates no change in quantity demanded. Graph:

If demand for something is perfectly inelastic, then the quantity purchased won’t change no matter what the price is.

Time period. Time is the most significant factor which affects the elasticity of supply. If the price of a commodity rises and the producers have enough time to make adjustment in the level of output, the elasticity of supply will be more elastic. If the time period is short and the supply cannot be expanded after a price increase, the supply is relatively inelastic. Monetary or intermediate – in this period supply will be perfectly inelastic and the supply is fixed. Short-run- in this state supply is inelastic. The output of production can increase even if equipment is fixed. Long-run- in this period, supply is elastic. New firms are expected to enter or the old one may leave the industry.

(2) Ability to store output. The goods which can be safely stored have relatively elastic supply over the goods which are perishable and do not have storage facilities.

(3) Factor mobility. If the factors of production can be easily moved from one use to another, it will affect elasticity of supply. The higher the mobility of factors, the greater is the elasticity of supply of the good and vice versa.

(4) Changes in marginal cost of production. If with the expansion of output, marginal cost increases and marginal return declines, the price elasticity of supply will be less elastic to that extent.

(5) Excess supply. When there is excess capacity and the producer can increase output easily to take advantage of the rising prices, the supply is more elastic. In case the production is already upto the maximum from the existing resources, the rising prices will not affect supply in the short period. The supply will be more inelastic.

(6) Availability of, infrastructure facilities. If infrastructure facilities are available for expanding output-of a particular good in response to the rise in prices, the elasticity of supply will be relatively more elastic.

(7) Agricultural or industrial products. In agriculture, time is required to increase output in response to rise in prices of goods. The supply of agricultural goods is fairly inelastic. As regards the supply of manufactured consumer goods, it is comparatively easy- to increase production in a short period. Therefore, the supply of consumer goods is fairly more elastic. In case of supply of aeroplanes or any other heavy machinery, the supply is relatively inelastic as it takes time to manufacture heavy machinery.

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