Price Elasticity of Demand: Four Factors Strolling

Price Elasticity of Demand: Four Factors

Strolling through the aisles at the local Boston Store led me to the Jeans department where I was overwhelmed with the selection: Guess, Ralph Lauren, Levi Strauss, Calvin Klein, and others. Which of these products would I purchase and how would the price elasticity of demand impact my decision? The definition of price elasticity is straightforward: "how much the quantity demanded changes when the price changes; the formula written as percent change in quantity demanded divided by the percent change in price" (NetMBA. N.D.). A good is considered elastic (>1) if a price change elicits a greater proportional change in quantity demanded. Inelastic (

Four Factors of Influence

Four factors influence and ultimately impact the price elasticity of demand for a given product: substitute availability, specific nature of the good, portion of income spent on the good, and time horizon available for the consumer to purchase. At first glance the Calvin Klein jeans were $80.00 however, as mentioned there were a myriad of substitutes priced lower from which to choose, and as such the greater the number of substitutes available the more elastic the good is considered. Regarding specific nature of the good; is it a luxury or a necessity? A luxury good will have a higher elasticity and in this case the jean purchase was more of a luxury than necessity. Portion of income spent on purchase explains that the greater percentage of income spent on the product the greater the elasticity. In this case the maximum jean price is $80.00 which does not represent a large portion of my income which makes the jeans more inelastic. The time horizon speaks to how long I can wait to purchase the jeans, and in this case I already own multiple pairs so I can afford to wait to buy; as such the longer the time horizon the greater the elasticity.

Elastic, Inelastic, or Unit Elastic

As discussed earlier a product's price elasticity is elastic, inelastic, or unit elastic. Looking at the four factors: the availability of jean substitutes indicates elastic, the status of the jeans as non-necessity dictate elastic; the small proportion of income however, indicates inelastic, lastly the elongated time frame describes an elastic product. Based on this analysis the jeans are elastic, likely highly elastic perhaps greater than two, because if the Calvin Klein price increased from $80.00 to $100.00 there would be a significant drop in quantity demanded.

Effect of Current Supply and Demand