Last week I gave my students a question related with this point. It was interesting to see that they made two groups, ones defending price elastic and the other ones saying it is price inelastic. I also invite a colleague to join the discussion.
Let see the arguments:
Price elastic: There are close substitutes, as for example water, so a small change (increase) on the price of soft drinks will produce a change (reduction) on the demand as people will now move to water.
Price inelastic: This group thought that as all the soft drinks were included, then even though prices were increased, there were no other chances to choose from – they didn’t see water as a close substitute, so people will accept this increase producing only small reductions on the quantity demanded when prices were increased.
What both groups didn’t include in their analysis were the determinants of demand, as for example taste, fashion, income, etc
Let see the arguments:
Price elastic: There are close substitutes, as for example water, so a small change (increase) on the price of soft drinks will produce a change (reduction) on the demand as people will now move to water.
Price inelastic: This group thought that as all the soft drinks were included, then even though prices were increased, there were no other chances to choose from – they didn’t see water as a close substitute, so people will accept this increase producing only small reductions on the quantity demanded when prices were increased.
What both groups didn’t include in their analysis were the determinants of demand, as for example taste, fashion, income, etc
These are two different points of view, what do you think, are there other possibilities or you subscribe to one of the previous ones?
I’ll like to listen your opinion.
Till my next post!
Prof. Lic. Fernando Julio Silva, MSc.
NOVEMBER 2008
