After you have worked through this section of the learning unit, you should be able to:
- describe the impact that factors such as availability of substitutes, proportion of income spend, time period and nature of the product have on price elasticity
Different price elasticity coefficients
| Goods and services | Price elasticity coefficient | Goods and services | Price elasticity coefficient |
|---|---|---|---|
| Salt | 0,1 | Tyres | 0,9 |
| Matches | 0,1 | Shoes | 0,91 |
| Electricity (Households) | 0,13 | Private education | 0,1 |
| Coffee | 0,25 | Motor vehicles | 0,14 |
| Medical care | 0,31 | Beef | 1,27 |
| Tobacco products | 0,45 | Restaurant meals | 2,27 |
| Fuel (petrol) | 0,6 | Lamb and mutton | 2,65 |
| Beer | 0,9 | Fresh tomatoes | 4,6 |
Source: Janse van Rensburg, J., Mconnel, C.R. & Brue, S.L. 2015. Economics. McGraw Hill: London.
Why, for instance, is fuel relatively price inelastic, and restaurant meals relatively price elastic?
This might be due to the following factors:
- availability of substitutes
- proportion of income spend
- time period
- nature of the product
Activity
Which of the following factor(s) will tend to cause the demand for a good or service to be price elastic?
- The more substitutes there are available for the good or service
- The more necessary the good or service is
- The lower the proportion of income spent on the good or service
- The longer the time period is
a and d.
The more substitutes there are and the longer the time period, the more elastic the demand for the good or service will be.
The more necessary and the lower the proportion of income spend on the good, the more inelastic it will be.
Indicate whether the price elasticity of demand for Toyota sport utility vehicles (SUVs) will increase, decrease or remain the same in the following situations:
Other motor manufacturers enter the market, resulting in a greater variety of SUVs.
Correct.
There are more substitutes available which gives more choices to consumers and the price elasticity of demand therefore increases (becomes more elastic). In other words, the elasticity coefficient increase.
Think again.
There are more substitutes available which gives more choices to consumers and the price elasticity of demand therefore increases (becomes more elastic). In other words, the elasticity coefficient increase.
Think again.
There are more substitutes available which gives more choices to consumers and the price elasticity of demand therefore increases (becomes more elastic). In other words, the elasticity coefficient increase.
The government bans the importation of SUVs.
Think again.
There are less substitutes available which gives less choices to consumers and the price elasticity of demand therefore decreases (becomes more inelastic).
In other words, the elasticity coefficient decreases.
Correct.
There are less substitutes available which gives less choices to consumers and the price elasticity of demand therefore decreases (becomes more inelastic). In other words, the elasticity coefficient decreases.
Think again.
There are less substitutes available which gives less choices to consumers and the price elasticity of demand therefore decreases (becomes more inelastic). In other words, the elasticity coefficient decreases.
Through advertising and marketing, Toyota is able convince the public that its SUV is the safest.
Think again.
In the mind of the consumers there are less substitutes available which decreases the price elasticity (it becomes more inelastic). In other words, the elasticity coefficient decreases.
Correct.
In the mind of the consumers there are less substitutes available which decreases the price elasticity (it becomes more inelastic). In other words, the elasticity coefficient decreases.
Think again.
In the mind of the consumers there are less substitutes available which decreases the price elasticity (it becomes more inelastic). In other words, the elasticity coefficient decreases.
Indicate whether the price elasticity of the demand for movie theatre tickets will increase, decrease or remain the same because of the following:
Television broadcasts include more current movies.
Correct.
More substitutes are available which increase price elasticity (it becomes more elastic)
Think again.
More substitutes are available which increase price elasticity (it becomes more elastic)
Think again.
More substitutes are available which increase price elasticity (it becomes more elastic)
The movies are released on DVD.
Correct.
More substitutes are available which increase price elasticity (it becomes more elastic)
Think again.
More substitutes are available which increase price elasticity (it becomes more elastic)
Think again.
More substitutes are available which increase price elasticity (it becomes more elastic)
More people are able to download movies from the internet.
Correct.
More substitutes are available which increase price elasticity (it becomes more elastic)
Think again.
More substitutes are available which increase price elasticity (it becomes more elastic)
Think again.
More substitutes are available which increase price elasticity (it becomes more elastic)
The following table indicates the demand for airline tickets between Johannesburg and Cape Town for business travellers and holiday travellers.
| Price (R) | Business travellers (quantity demanded) |
Holiday travellers (quantity demanded) |
| 700 | 2 000 | 1 600 |
| 1 200 | 1 800 | 1400 |
| 1 700 | 1 600 | 1 200 |
| 3 000 | 1 400 | 1 000 |
| 3 500 | 1 200 | 800 |
| 4 000 | 1 000 | 600 |
Assume that the price increases from R3 000 to R3 500.
- Using the midpoint method, calculate the price elasticity for business travellers and the price elasticity for holiday makers.
- Choose the correct option in brackets.
The price elasticity for business travellers is (more elastic, less elastic) compared to the price elasticity for holiday travellers. - Which of the following might be the reason(s) for the difference between the price elasticity for business travellers and the price elasticity for holiday travellers?
- For business travellers travelling between Johannesburg and Cape Town, airline tickets are more of a necessity than for holiday travellers.
- Fewer substitutes are available for holiday travellers than for business travellers.
- The travel costs for business travellers are paid by the business, while holiday travellers pay for their travel costs out of their own pocket.
- Using the midpoint method, the price elasticity for business travellers is 1, and the price elasticity for holiday makers 1,44.
- The price elasticity for business travellers is less elastic compared to the price elasticity for holiday travellers.
- 1 and 2
In the example, the price elasticity for business travellers is 1, while that for holiday makers is 1,44. This indicates that the demand for airline tickets by business travellers is unitary (it has a value equal to 1), while the demand for airline tickets by holiday travellers is elastic (it has a value of more than 1). It therefore follows that the price elasticity for business travellers is less elastic compared to the price elasticity for holiday travellers.
The following are possible reasons for business travellers facing a less elastic demand for airline tickets:
Business travel is more of a necessity than a luxury good. Business travellers usually have to be at a meeting at a specific time and place.
Airline travel is the quickest way to travel between Johannesburg and Cape Town, and given the fact that time is valuable for business travellers they tend not to regard the other modes of travel between Johannesburg and Cape Town as viable options. There are therefore fewer substitutes available for business travellers than for holiday makers.
For business travellers, the cost of airlines tickets is paid by the business and this will indeed tend to decrease the elasticity of the demand for airline tickets.