In the short run, Peter has little choice about the amount of petrol he uses. He might cut down on some of his travelling – fewer trips to the shops and over weekends. In the long run, however, he has more choices. He could, for instance, replace his car with a more fuel-efficient car, join a lift club or move to an area closer to his work.
As a general rule, we can state the following:
- The longer the time period under consideration, the greater the price elasticity of a good or service will be.
- This short-run versus long-run elasticity has an important impact on the way prices are set in a market.
- Take, for example, the cost of an airline ticket from Johannesburg to Cape Town. If you visit different airlines and you compare the cost of a ticket next week with one in three months' time, you will probably find that purchasing an airline ticket three months in advance is cheaper than purchasing it one week in advance.
- The reason is that you have more time to look for substitutes, and manage and change your travel and accommodation arrangements.
Nature of the product
We can expect that goods that are necessary for our survival will tend to be relatively inelastic. These are things such as water, food, shelter and medical services. Luxuries, however, such as vacations, designer clothes and shoes, or champagne, will be relatively price elastic. Whether a good is regarded as a luxury or necessity depends on the taste and preference of the individual, and there is no exact rule to determine what goods can be classified as luxuries or necessities.
As a general rule, we can state that if a good is regarded as a necessity, it will be relatively inelastic,
whereas if it is regarded as a luxury good, it will tend to be elastic.