Price elasticity refers to the degree of responsiveness of consumers and suppliers to price changes: the degree to which the demand or supply of a good or service is affected by changes in price. Although, in general, demand goes up as price goes down and supply goes up as price goes up (and vice versa) for most goods and services, the degree to which this is true is not universal (Elasticity, 2011, Investopedia). Necessities, particularly in the short run, like gas and staple groceries, are less resistant to changes in price than non-necessities. For example, if the price of gas plummets, in the short-term there is only so much 'extra' driving someone can or will want to do. If the price of gas rises, there is only so much driving a person can cut out of his or her life, unless he or she lives in a city like New York with an extensive public transportation system. Demand for non-necessities like Starbucks lattes are likely to increase if the price goes down, but decrease if the price takes a sharp upturn, as lattes can be easily cut out of a consumer's budget.
Another factor which can impact price elasticity is the availability of substitutes. During the recent 2008-2009 recession, sales of baked beans and supermarket brands rose by over 20% in April of 2009, versus April 2008 (before the recession began). "Sales of organic products, which might be considered 'normal luxury' goods, fell by over ten percent. Consumers are switching away from the pricier organic ranges to lower priced products. If we take the change in income as minus 4% based on GDP "when it is possible to work out the income elasticity of demand for those products as minus 5 for the baked beans and own brands, and plus 2.5 for the organic goods -- all quite significantly income elastic" (Brooks 2005).
However, what constitutes a 'substitute good' may not be immediately obvious, except at a very basic level such as the price of apples vs. oranges or organic grass-fed beef vs. baked beans. For example, technological products have a high degree of 'buy-in' on the part of the consumer, which can mitigate the effect of income elasticity. Once someone is locked into a purchase of a particular operating system, it is difficult to change, rendering the item more likely to be viewed as a necessity and substitute goods are more difficult to use. For example, when a consumer has purchased a particular computer operating system, even if he or she is dissatisfied with the price of buying new software or the performance of the system, he or she is less responsive to changes in price than, for example, an item without a large amount of exit costs, such as a restaurant meal. Theoretically, a dissatisfied PC consumer could scrap his or her model and simply acquire a Mac, but to do so would be expensive, and would require acquiring new software as well as learning how to use the new system.
Having a computer is necessary for most households today, but what about non-necessary items such as video game consoles? The Xbox was one of the hottest Christmas toys several years ago. In the short run after its initial release, the Xbox had very inelastic demand, like many 'hot toys' of the season (Cabbage Patch Kids, for example, Furbys and Zhu pets) but demand quickly became more elastic after the high-demand toy period of Christmas passed. Today, elasticity for new versions of the Xbox may be impacted by the existence of a level of 'buy-in' for the product. Xbox users currently already have games for the system and a familiarity with its use, thus consumers may be unwilling to change operating systems. True, the Xbox is not a 'necessity' like gas and food, but compared with other consumer products, the 'buy-in' factor may limit elasticity -- the cost of complementary goods (such as the cost of buying new games for a new system) may keep Xbox consumers loyal.
On the other hand, the high price of Xbox games may discourage new purchasers, and motivate them to elect another type of consol. For example, serious gamers who buy…
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