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The price elasticity of demand measures the responsiveness of consumers to changes in price.

For example, if consumers change their purchasing behavior very little in response to a

drastic change in price, demand is said to be inelastic; but if consumers change their

purchasing behavior a lot in response to a small change in price, demand is said to be

elastic.

If a good has several close substitutes, then many consumers will respond to an

increase in the price of the good by purchasing one of those close substitutes. For

example, many people believe that Coke and Pepsi are close substitutes for each other.

Therefore, holding the price of Pepsi constant, if the price of Coke were to increase,

many consumers would decide to switch to Pepsi. Therefore, the demand for Coke is

relatively elastic. By contrast, there are no close substitutes for insulin as a treatment for

diabetes. As a result, an increase in the price of insulin will not lead to a noticeable

decline in insulin consumption. The demand for insulin is relatively inelastic.

-sports car=elastic demand (price is much more of a factor in the purchase of a sports car, because it is

a LUXURY).

When people buy a luxury good, such as a sports car, the price of the good and the prices of

similar goods (e.g., sports cars) will be major factors in their purchasing decisions. When

people decide whether to purchase a necessary medical treatment, price is much less of

a factor—especially if no other treatments can achieve the same result. Since the price

elasticity of demand measures the responsiveness of buyers to changes in price, the

elasticity of demand for Amputation procedures for diabetes sufferers is likely to be much

lower than the elasticity of demand for sports cars.

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Merlot - Most Elastic

Wine - In Between

Beverages -Least Elastic

The overall category of beverages has no close substitutes, so the demand for

beverages, in general, is very inelastic. However, the more specific the type of

beverages, the more close substitutes are available. If the price of wine rises, a

consumer could purchase beer or soda, but most people would not consider those very

close substitutes. If the price of merlot rises, consumers could switch to shiraz or

cabernet.

More substitutes are available in the long run than in the short run. If oil prices rise sharply, firms

that currently use oil or oil-based products to produce goods and services will not be

able to quickly switch to another energy input. Furthermore, consumers who rely on

products derived from oil—such as gasoline for cars—will find it difficult to switch to

alternative fuels in the short run.

In the very short run, the demand for oil is highly inelastic. If the price of oil stays high for

a long period of time, firms and families will begin moving away from or finding

substitutions for oil-intensive activities and products. Firms may adopt alternative energy

sources, such as solar power, coal, or ethanol. Households may begin to drive less and

drive more fuel-efficient cars when they do. Since buyers of oil and oil-based products

can pursue more alternatives to oil in the long run, the price elasticity of the long-run

demand for oil is more elastic than the price elasticity of the short-run demand for oil.