ELASTICITY AND CONSUMER BEHAVIOR
Elasticity and Consumer Behavior
Based on the law of demand, buyers are willing and able to purchase more goods and services at lower prices than at higher prices. These are natural reactions or inclinations of buyers. However, such reactions vary depending on the importance and availability of the goods and services. These varying reactions are known as demand elasticities.
In the case of producers or sellers, they have also their reactions to price changes. Clearly, they tend to sell more goods and services when prices are higher. Their reactions also vary depending on their ability to produce in a given time. For instance, they cannot take advantage of higher prices if they cannot produce the goods and services. Such varying reactions of producers are known as supply elasticities.
Another consumer behavior is the nature of human satisfaction. It has been experienced that consumption of more goods of the same kind reduces the level of satisfaction. In addition, our desire to satisfy our human wants are restricted by our purchasing power or budget.
This chapter discusses, with the support of graphs and tables, the elasticities of demand and supply, together with their determinants. Also, theories of consumer behaviors are presented.
Elasticity of Demand
Demand elasticity refers to the reaction or response of the buyers to changes in price of goods and services. As mentioned earlier, buyers tend to reduce their purchases as price increases, and tend to increase their purchases whenever price falls. These are logical reactions to price changes. However, such reactions vary in accordance with the nature of the products and the particular needs of the buyers. For example, if a product is very important to the consumers, they have to buy it despite the big increase in its price. On the other hand, there are products in which with just a slight increase in their prices, many consumers are reluctant to buy such products. These products are not important to them They can still live without said products.
There are five types of demand elasticity or types of reaction.* of buyers to price changes of goods and services:
1. Elastic demand. A change in price results to a greater change in quantity demanded. For example, a 20 percent change in price (decrease or increase) creates a 60 percent change in quantity demanded (increase or decrease). This shows buyers are very sensitive to price change. They are easily discouraged to buy the products if their prices increase-However, they are easily encouraged to buy the same products if their prices decrease. Such products are not very important to them, but they provide comforts and pleasures to the consumers. These are the luxury goods like stereo, radio, camera, television set, etc.
2. Inelastic demand. A change in price results to a lesser change in quantity demanded. For example, a 50 percent change in price creates only a 5 percent change in quantity demanded. This means buyers are not sensitive to price change. Products under this category are very essential to buyers. They cannot live without them; it is hard to live without such products like rice, medicine, or shelter. People have to buy said products even if there is a big increase in their prices. However, a big decrease in the prices of the aforementioned goods has a very little increase in quantity demanded. For example, a great decline in the prices of rice and medicine does not encourage people to eat more rice or take more medicine. They only buy as much as the requirement of their normal consumption. But if the price of rice is very high and many people can not afford such price, they are forced to eat only twice a day, or mix rice with corn. Many extremely poor people are doing this.
3. Unitary demand. A change in price results to an equal change in quantity demanded. For example, a 25 percent change in price produces a 25 percent change in quantity demanded. Goods or services under this category are considered semi-luxury or semi-essential goods. Some types of clothing or shoes are either luxury or essential goods.
4. Perfectly elastic demand. Without change in price, there is an infinite change in quantity demanded. Such demand applies to a company which sells in a purely competitive market. More details on this are explained in Chapter 5.
5. Perfectly inelastic demand. A change in price creates no change in quantity demanded. This is an extreme situation which involves life or death to an individual. Regardless of price, he has to buy the product like a medicine with no substitute.