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
2 comments:
I think price is elastic because change in taste, preference or income people will cut down the beverage of soft drinks from their to-buy list, though it is an addictive thing (in my opinion) but people can survive without it.
in case of water it would've been inelastic because whether the price increase or income decrease people have no other way but to drink water. Though soft drinks are close substitute of water but it can't replace the place of water in case of survival.
Dear Fairooz
I agree with you in the case of water, but also soft drinks-even though could be replaced - and due of been an addictive product are not reduced that much on their consumption; people may switch between different brands, but they'll still buy them.
Of course, as not been a basic need, if prices increase so much will be replaced by other type of beverages.
Thanks for your participation!
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