Edco Elasticity & Individual Consumption

Elasticity and Individual Consumption

 

Imagine this, you have to choose one, and only one of the following five things for the next month:

  • Instagram
  • Netflix
  • Your favourite food
  • Texts and messages
  • Earphones

Which would you pick? Well, the answer is the very essence of what elasticity is all about. The more you would choose one thing over all else proves that if the price of that item went up, or your income came down, how much less that would affect your demand for that product.

Our Leaving Cert students and teachers told us that their order of preference was:

During this Positive Economics webinar, we investigated what different examples of elasticity, how they can change over time and how price discrimination is a strategy that businesses can use to make strategic decisions.

Different examples of elasticity

During my first ever trip to New York, I remember feeling really thirsty when on an intense day of sightseeing one hot Summer's day. I wouldn't have quibbled for a moment if a half litre bottle of water cost $10 instead of $1 because I was quite dehydrated. That's an example of "perfectly inelastic demand" as the price didn't matter.

I ran a poll with the group and asked them if Instagram Messenger started to charge them for using that service, would they use a different app for sending messages. 95% of them said they would move. This is an example of "perfectly elastic demand" because any change in price would drive the quantity demand to zero (or close enough to it).

Elasticity changes over time

These two states (perfectly elastic and perfectly inelastic) are two extremes and most people's feeling about the goods and services they buy fall in between. I might really enjoy eating out at an Indian restaurant as I love their naan bread, spices from the Far East and crunchy poppadoms (and thus have inelastic demand) whereas if I think one pizza is the same as another, my demand for getting a delivery of pizza might be elastic as I simply choose the one that is offering a 10% discount.

However, things can change over time.

The students and teachers shared what became more important to them over lockdown in this word-cloud.

 

In this case, their demand for things like wi-fi, technology subscriptions and exercise equipment became more inelastic. If the price of these things increased a little, it's likely that the audience would have still maintained their spend on these items.

Of course, it can go the other way too and we asked the audience about this too.

During lockdown, since our students and teachers weren't going on holidays or socialising in big groups, they were less bothered by the price of clothes, flights or things that contribute to one's social life. In essence, during lockdown, their demand became more elastic.

Price discrimination

Of course, businesses can use this information and structure things to suit. For example, they may offer discounts to price elastic students or to people who can easily avoid busy times to attract them into their coffee shops at certain quiet stages of the day. It's an age-old strategy!

Join us for the next Positive Economics webinar on Wednesday 20th January focusing on Employment and the Economy