Does the Purchase Use a Large Portion of Income?

Date: 2015-10-07; view: 621.

Are Adequate Substitutes Available?

If the price of beef goes up, buyers can switch to chicken. With enough substitutes, even small changes in the price of a product will cause people to switch, making the demand for the product elastic. The fewer substitutes available for a product, the more inelastic the demand. Sometimes only a single adequate substitute is needed to make demand elastic. For example, in the past there were few substitutes for sending a letter through the post office. Then fax machines allowed messages to be transmitted over phone lines. Today many people use e-mail on the Internet or send instant messages on their cell phones. Because of all these alternatives, it is more difficult for the Postal Service to increase its total revenues by raising the price of a first-class stamp.

Note that the size of the market is important. For example, the demand for gasoline from a particular station tends to be elastic because consumers can buy gas at another station. If we ask about the demand for gasoline in general, however, demand is much more inelastic because there are few adequate substitutes for gasoline.

Finally, you may have noticed that the answers to our three questions is not always “yes” or “no” for each of the products shown in the table after the text. For example, some products such as salt may be easy to classify, since each of the answers is “no”. However, we have to use our judgment on others. For example, the demand for the services of medical doctors tends to be inelastic even though they require a large portion of income. This is because most people prefer to receive medical care right away rather than taking the time to look for adequate substitutes.