Economics is the only course I ever failed. It was my first semester at Rutgers and I took it pass/fail where pass meant an A, B or C. It just did not connect with me, and I got a D.
And yet, today I pay a lot of attention to things that fall under the heading economics. I watch CNBC every morning. I check my stocks. I know what it means when they say credit default swap and EFT. I guess these lousy economic times has all of us paying a bit more attention to economics.
Investopedia says that elasticity is the situation in which the supply and demand for a good or service can vary significantly due to the price. For example, the airline industry is very elastic because all airlines offer a very similar service, so, for the most part, an airline can’t have prices that are significantly different from those of its competitors because this can result a huge loss of business to competitors. Many products in food stores are elastic. If the price of strawberries shoots up, people stop buying strawberries.
But – and this is the interesting part to me – when the demand for a good is said to be inelastic, it means that changes in price have a relatively small effect on the quantity of the good demanded.
The example used on Planet Money was alcohol. You can raise the price, you can tax it, you can even ban it (Good old Prohibition!) and people will still demand it.
In a related way, cigarettes and even marijuana economics are inelastic. So is gasoline relatively inelastic for modern America. Prices go up, shortages occur, the taxes on it are raised, and we still pull up to the pump and demand it because we just have to drive.
This concept applies to products, but it can also be a service. We are a very service-oriented society now, and I think that having an inelastic service is the way to make a lot of money these days.
The two best examples are the Internet and cell phone services. These inelastic services are ones in which changes in price seems to cause only modest changes in the quantity demanded or supplied, if there’s any change at all.
An economist might have once said that these goods or services needed to be things that are a necessity to the consumer in daily life. It would be hard to prove that the Net and cell service is absolutely necessary to daily life, but I know people who would say it’s true for them. And they are willing to pay for it, whatever the cost.
For the mathematical readers, Price Elasticity = (% change in quantity / % change in price). If elasticity is greater than or equal to one, the curve is considered to be elastic. If it is less than one, the curve is said to be inelastic.
Look at two factors that influence a demand’s price elasticity and consider them for the Internet.
The availability of substitutes might be the most important factor influencing elasticity. More substitutes means more elastic demand. What your substitute for an Internet connection?
The amount of income available to spend on the good is another factor. If the price goes up, but your income stays the same or drops, you will decrease your demand for elastic goods. (You’ll buy less of those $4 cups of coffee or buy another cheaper brand or even make your own.) For the Internet, I’ll bet people will give up some other things (like a few premium cable channels) in order to maintain their Net access.
What would you be willing to give up in order to maintain your connection? What are the inelastic goods and services in your daily life?
The use of a phone “land line” in homes has dropped significantly, especially with young people who see no need for it. As people continue to move to using their phone as their substitute device for the Internet, I suspect the demand for computers and even an Internet connection at home will decrease.
It will be interesting to see how this elasticity plays out the next few years.
And I’d like to have that economics grade reconsidered. I think I get it now. How about at least a C?