The elasticity of demand

As per the law of demand, the higher is the price of goods, the less the consumers will purchase, and the most commonly used measure of consumer sensitivity to price is called price elasticity of demand where 1 % drop in the price of a product creates a 1 % increase. Hundreds of studies have been conducted where the factor is found mostly in the range of .5 and 1.5.

The items that are very important for everyday living has fewer substitutes and they have low elasticity just like staple foods, housing, gas, tomatoes and restaurant meals are required every day and cannot be substituted easily. Inelastic is used for items, where if the per cent change in the quantity required is less than a percentage change in price can happen.

There are certain goods with many substitutes and there are some that have higher elasticity. The automobile sector is somewhat elastic where one can delay the purchase of a new vehicle but the demand for a specific model is highly elastic and there are many substitutes available in multiple ranges. The price of electronics items like the smartphone is elastic where the increase in price can lower the demand.

The three main factors that influence demand are

• Luxury versus necessity – The necessity has poor substitutes but luxury items have many substitutes.
• Food is a necessity.
• Elasticity is higher in the long run as people are free to adjust their behaviour.
• It is greater when the market is defined narrowly like food versus ice cream.
• It is the factor that can be used to compare the demands for different goods.

If demand is elastic, the given percentage rise in price brings a large percentage decrease in quantity demanded and the total revenue decreases.

In the case of inelastic – the increase in price leads to an increase in total revenue. Also, it depends on where we are on the demand curve.

Mankiw adopted the method of reporting the absolute value of price elasticity.

Its impact on drug policy and crime -

• The US devotes billions towards drug related police crime. One can report a crime to lower the supply which causes a new equilibrium to be at a higher price and lower quantity.
• Non-users demand for addictive substances is elastic. The existing user demand for such substances is inelastic.
• For inelastic, it raises the total revenue received in a drug deal and the total expense by the addicts. Holding a fixed number of addicts, the increase in cost is financed by the growth in drug related crimes.