Demand is more elastic when there are close substitutes, the good takes a large share of income, or buyers have time to adjust.
Number and closeness of substitutes: this is the most important influence. If a good has close substitutes, buyers switch easily when its price rises, so demand is elastic. A single brand of cola has elastic demand. Medicine with no alternative has inelastic demand.
Proportion of income spent on the good: a price rise for something cheap, such as salt, barely affects buyers, so demand is inelastic. A price rise for a car or a holiday takes a big bite from income, so demand is more elastic.
Necessity or luxury: necessities such as basic food and electricity tend to have inelastic demand. Habit-forming goods, such as cigarettes, are also inelastic.
Time: demand becomes more elastic over time as buyers find substitutes. How the market is defined matters too. Demand for one brand of petrol is far more elastic than demand for petrol in general.
- Substitutes
- More and closer substitutes make demand more elastic.
- Share of income
- Larger share of income makes demand more elastic.
- Necessity or habit
- Makes demand more inelastic.
- Time
- Demand is more elastic in the long run.
Worked example: Explaining why demand for petrol is inelastic
A question asks why a rise in petrol prices barely reduces how much drivers buy.
- Few close substitutes in the short run: most cars run only on petrol.
- Necessity: many people need to drive to work or for deliveries.
- Time: switching to an electric car or changing jobs takes time, so demand is more elastic in the long run.
- Conclusion: quantity demanded falls by a smaller percentage than the price rises.
Watch out for this
Goods that are expensive always have elastic demand.
What matters is the share of the buyer's income and whether substitutes exist. Some expensive goods, such as essential surgery, have inelastic demand.
Check your understanding
Which good is most likely to have price elastic demand?
- One particular brand of bottled water
- Tap water supplied to homes
- Salt