Last week was focussed on the law of demand and price elasticity – with definitions of each as well the different types of elasticity. This week looks at real world examples of the different types of price elasticity.
When the change in demand exceeds the change in price. If for example a price increase significantly reduces demand, or a price decrease significantly increases demand, demand is considered to be elastic. Real world examples or elastic demand tend to include discretionary purchases, products or services with many readily available alternatives, and things that are expensive relative to income.
When the change in demand is smaller than the change in price. If for example an increase in price does not significantly reduce demand, or a decrease in price significantly increase demand, demand is said to be inelastic. Real world examples tend to include essentials (gasoline, medicine), addictive products (cigarettes) and inexpensive/infrequently purchased items with few real alternatives (sale, toothpicks, etc.).
A special situation where the law of demand is reversed, and demand increases alongside price. Real world examples of reverse elasticity include luxury goods where exclusivity is part of the appeal – it is the high price that creates the demand.
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