All consumer goods are governed by the laws of supply and demand, so every type of consumer good demonstrates the price elasticity of demand. However, this does not mean the relationship between demand and price is equal across all types of consumer goods. Some types of consumer goods display high price elasticity of demand, while others show very little.
There are a variety of factors that determine a good's price elasticity of demand. These include such things as the essential or non-essential nature of certain goods, the availability of competitive substitutes, and the effect of a good's brand name and marketing.
- Price elasticity of demand is an indicator of the impact on the demand for a product in relation to its price change.
- Some types of consumer goods show a higher price elasticity of demand than others.
- For example, non-essential goods have a high elasticity of demand, while essential goods or consumer staples have a low elasticity of demand.
- Factors that affect the price elasticity of demand include the availability of competitive substitutes and the brand recognition of products.
Essential vs. Non-Essential Consumer Goods
Consumer staples are a sub-category of consumer goods that are regarded as essential products. Examples of this include food, beverages, and certain household goods. Consumers view these goods as primary and essential for life. These are the staples people are unable (or are unwilling) to eliminate from their budget. Additionally, these products are non-cyclical, meaning they are needed and used year-round, not just seasonally.
Non-essential goods, on the other hand, are products that are not absolutely necessary. Examples of non-essential items that consumers spend money on are impulse purchases, dining out, jewelry, and electronics. During financially difficult times, consumers frequently cut spending on non-essential goods, eliminating them from their budget.
As a category of goods, essential goods have a low elasticity of demand. There will always be a need for consumer staples and a change in price is unlikely to impact demand. On the other hand, the demand for non-essential goods can fluctuate greatly. The demand can plummet depending upon the economy and the overall financial situation of consumers. Because of this, non-essential goods have a high elasticity of demand.
Availability of Competitive Substitutes
There are several important factors that influence a good's price elasticity of demand. If the good has plenty of competitive substitutes, elasticity tends to be greater because consumers can easily make a switch when prices rise too much. More expensive goods also tend to be more elastic since consumers are more sensitive to purchases that take up larger proportions of their income.
Within the category of consumer staples, the price elasticity of demand changes if the marketplace has responded by offering competitive substitutes or if the consumer is willing to accept a lower-priced product over another. For example, hamburgers have a relatively high elasticity of demand because there are plenty of alternatives for consumers to choose from, such as hot dogs, pizza, and salads.
Gasoline and oil, however, have no close substitutes and are necessary to power equipment and transportation. These have a low price elasticity of demand.
Brand Name and Marketing
Brand names and marketing have a large impact on the price elasticity of demand as well. When comparing similar products with different price points, consumers may purchase the higher-priced product if their brand loyalty to that product is high. Because of this, a 5% increase in the price of well-known brands—such as Coca-Cola drinks or Nike shoes—has less impact on demand than a 5% increase in a lesser-known and less-trusted competitor.
The Bottom Line
Goods that are considered essential have a low elasticity of demand. Electricity, gas, oil, and water are all relatively inelastic because consumers rely on these as necessities rather than luxuries. Also, keep in mind that the price elasticity of demand is very time-sensitive. More consumers notice and react to price changes as time goes on, meaning price elasticity of demand tends to increase as time passes.