Why fuel never goes on sale
It all comes down to Price Elasticity. Knowing elasticity of demand will help you understand why things cost as much as they do. Hint: You'll still buy gas no matter how expensive the price.
Key Takeaways:
Economists use three elasticities: price elasticity, income elasticity, and cross elasticity to answer the question: “how much?”
Businesses use elasticity to predict how you will react when they change their prices or how you will react when your income changes.
Elasticity answers the question: how much? How many fewer apps will people buy when the price of apps rises? How many more taxi rides and fewer bus rides will people buy when their incomes rise? How many more hot dogs will you buy? When hamburgers become more expensive? Economists use three elasticities: price elasticity, income elasticity, and cross elasticity to answer the question “how much?”
Price Elasticity
The price elasticity of demand tells us how sensitive people's purchases are of a product to changes in the price of the product. For example, if the price of gas rises a lot, and you still buy the same (or just a little less gas than you did before), we say that your consumption of gas is not very sensitive to price changes. Economists say that your consumption of gas is: Price Inelastic.
If the price of apps rises a little and you buy a lot fewer apps, then we say that your consumption of apps is very sensitive to price changes. Economists say that your consumption of apps is: Price Elastic.
Income Elasticity
The income elasticity of demand tells us how sensitive people's purchases of a product are in response to changes in their incomes. For example, if your income rises a lot and you consume only a little more pizza than you did before, we say that your consumption of pizza is not very sensitive to income changes. Economists say that your consumption of pizza is: Income Inelastic.
If your income rises a little and you consume a lot more wine than you did before, we say that your consumption of wine is very sensitive to income changes. Economists say that your consumption of wine is: Income Elastic.
Income Elasticity also tells us whether consumers regard a product is superior, normal or inferior. For example, suppose that when your income rises by 10%, you consume 15% more recorded music, 10% more pizza, and 5% less ramen noodles. Economists say that, for you: recorded music is a superior product, Pizza is a normal product, and ramen noodles are an inferior product.
Cross Elasticity
The cross elasticity of demand tells us how sensitive people's purchases of one product are in response to changes in the price of a different product. For example, if the price of hotdogs rises a little and you consume a lot less ketchup than you did before, we say that your consumption of ketchup is very sensitive to changes in the price of hotdogs.
Cross elasticity also tells us whether consumers regard to products as: substitutes or complements.
Substitutes are goods that consumers usually consume in place of each other, like: Pizza and Spaghetti, beer and wine, or movies and baseball games. If the price of one rises, then the amount that you consume of the other rises as well.
Complements are goods that consumers usually consumed together like: hotdogs and ketchup, shoes and socks, or printer paper and ink. If the price of one rises, then the amount you consume then the other one falls.
Economists use elasticities to describe how you behave toward products. Whether you regard products as complements or substitutes or whether you regard them as superior or inferior. Businesses use elasticity to predict how you will react when they change their prices or how you will react when your income changes.