Brian Bass has written about accountancy-related topics and accounting trends for “Account Today.” He works as a senior auditor specializing in manufacturing and financial services companies for one of the Big 5 accounting firms. Bass hold a master’s degree in accounting from the University of Utah.

 

Types Of Consumer Goods That Show The Price Elasticity Of Demand

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.

Key Takeaways

  • 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.

Understanding Price Elasticity of Demand Price elasticity of demand is a concept in economics that measures the responsiveness of the quantity demanded of a product to changes in its price. It quantifies how sensitive consumers are to price fluctuations and how their buying behavior adjusts in response to price changes. The price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. Price Elasticity of Demand = Change in Quantity Demanded / Change in Price If the price elasticity of demand is greater than 1, the demand is considered elastic, indicating that consumers are highly responsive to price changes. A small increase in price leads to a relatively larger decrease in quantity demanded, and vice versa. On the other hand, if the price elasticity of demand is less than 1, the demand is inelastic, implying that changes in price have a proportionally smaller effect on the quantity demanded. In this case, consumers are less responsive to price changes, and their demand remains relatively stable even if prices fluctuate. Note that elasticity may move upward or downward. For example, consider a product with a high elasticity of demand. This means that should the manufacturer reduce the price of the good, the product is likely to have more demand. Alternatively, should the manufacturer increase the price of the good, the product is to have less demand. 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. Specific Types of Products There are a wide range of specific products that have higher price elasticity of demand. This list below is not meant to be exhaustive; instead, it provides specific examples that may or may not fit into the categories above that tend to be more elastic. Gasoline Gasoline is generally considered to be price elastic. When the price of gasoline increases significantly, consumers tend to reduce their consumption by driving less or opting for more fuel-efficient vehicles. Similarly, when gasoline prices decrease, demand tends to increase. Fast Food Fast-food products often show price elasticity of demand. When fast-food restaurants offer discounts or special deals, demand tends to increase, and people may be more inclined to purchase these items. On the other hand, when prices go up, consumers might reduce their consumption or opt for cheaper alternatives. This is due to the nature of substitute goods discussed above. Airline Tickets Airline tickets are generally price elastic. Airlines often adjust ticket prices based on demand and competition. Lowering prices during off-peak seasons or in response to competition can lead to increased demand for air travel. Movie or Concert Tickets Movie tickets are another example of a product with price elasticity of demand. When ticket prices rise, moviegoers may choose to watch fewer films in theaters and wait for discounts or streaming options. Alternatively, higher concert tickets may deter music-lovers from attending. Lower prices or promotional offers, on the other hand, can stimulate demand. Public Transportation Public transportation services, such as buses and trains, can also show price elasticity of demand. When ticket prices increase, some commuters may opt for alternative transportation methods or carpooling. Lower prices or subsidized fares can attract more ridership. Clothing and Apparel Clothing items, especially non-essential fashion items, generally have price elastic demand. Consumers may respond to changes in prices by either increasing or decreasing their purchases. Note that this isn’t usually the case for all types of clothing; essentials are often met with lower elasticity as consumers must buy certain clothes regardless of pricing. Generic Medications Generic medications often exhibit price elasticity of demand. When the price of a generic drug decreases significantly compared to branded versions, consumers may switch to the more affordable option, leading to higher demand for generics. This is true only when there are substitute medications available and consumers are less price-conscious. Subscription Services Subscription-based products such as streaming services and gym memberships may exhibit price elasticity of demand. Consumers may cancel or adjust subscriptions based on price changes or available alternatives. Consider the numerous streaming opportunities today; should a consumer no longer be satisfied with the pricing of one, it may be very easy to cancel the month-to-month subscription to join a different subscription. Are Necessities More Likely to Have Inelastic Demand? Yes, necessities like food, medicine, and utilities often have inelastic demand. Consumers tend to continue purchasing these products even if prices rise because they are essential for daily living, and viable substitutes may be limited. How Does Income Level Impact Price Elasticity? Income level can influence price elasticity. Products considered luxury items for lower-income consumers may have more elastic demand, while for higher-income consumers, those same products may exhibit inelastic demand. How Do Seasonal Products Exhibit Price Elasticity? Seasonal products may show varying price elasticities based on demand fluctuations throughout the year. During peak seasons, demand may be inelastic as consumers are willing to pay higher prices. Conversely, during off-peak periods, demand becomes more elastic, and price reductions can stimulate sales. What Are the Implications of Price Elasticity for Pricing Strategies? Understanding price elasticity is crucial for businesses when setting prices. For elastic products, price reductions can lead to increased revenue, while price increases may result in revenue loss. Inelastic products may allow for higher prices without significant demand declines. 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.

Of Agricultural Policy And Skyrocketing Food Prices

Food prices have continued to hit the roof despite the federal government’s renewed sectorial policy direction to consolidate previous agricultural development policies. Gilbert Ekugbe writes

The Federal Ministry of Agriculture and Rural Development (FMARD) conceived the National Agriculture Technology and Innovation Policy (NATIP) (2022-2027) as approved by the Federal Executive Council (FEC), over a year ago. However, food prices have continued to soar out of the reach of impoverished Nigerians.

The five year policy strategy, according to FMARD, is a renewed sectorial policy direction that would consolidate the successes recorded in the implementation of the previous agricultural development policies. It is also intended to reposition the National Agricultural Research System, holistic mechanisation drive, provision of rural infrastructure, standardisation of inputs and processing systems and techniques; development of commodity value chain through clusters and special agro-processing zones.

Sadly, not much has been achieved in these directions since the policy strategy was established.

Although, a new government is at the helm, stakeholders are expecting to see the political will needed to make the NATIP a success.

President Bola Tinubu in his address on the state of the nation is planning to invest N200billion in the cultivation of rice, maize, wheat and cassava to ensure that prices of food items remain affordable and stable.

According to him, his administration has planned to support the cultivation of 500,000 hectares of farmland while its all-year-round farming practice remains on course.

“To further ensure that prices of food items remain affordable, we have had a multi-stakeholder engagement with various farmers’ associations and operators within the agricultural value chain,” he assured.

He also stated that in the short and immediate terms, the federal government would ensure staple foods are available and affordable, explaining that his administration has ordered the release of 200,000 metric tonnes of grains from strategic reserves to households across the 36 states and FCT to moderate prices.

According to the National Bureau of Statistics (NBS), the cost of food in Nigeria increased 25.25 per cent year-on-year in June of 2023, the highest since September of 2005, led by prices for oil and fat, bread and cereals, fish, potatoes, yam and other tubers, fruits, meat, vegetable, milk, cheese, and eggs.

Recently, the Nigerian government has declared a state of emergency to tackle rising food prices and shortages. Some of the initiatives included providing farmers with fertilisers and seeds to mitigate the effects of subsidy removal and create a strategic food reserve to be used as a price stabilisation mechanism for cereals and other foodstuffs.

For instance, the prices of staple food have increased astronomically despite the dwindling disposable incomes. After a survey across different markets in Lagos, a bag of rice which sold for N30,000 has increased to N40,000 depending on the region, a 50kg bag of beans that cost N30,000 to N38,000 in November last year has now risen to N40,000 to N50,000, a small basket of tomatoes which used to sell for N6000 in March 2023, now goes for N16,000.

Although, THISDAY had reported that the Agricultural Produce Sellers Association of Nigeria (APSAN) blamed the rising cost of food prices on multiplicity of taxes.

The National President of APSAN, Mr. Aloys Akortsaha, had stated that over ten regulatory agencies collect tax on a single commodity as the cost would therefore be passed to Nigerian consumers.

“The major issue causing food inflation now is the multiplicity of taxes being faced by APSAN. People have been asking questions about the rise in food prices on a daily basis. We are faced by multiple taxes from different government regulatory agencies on a single commodity. You will find out that taxes are being paid on one commodity to different tax authorities in a state,” he lamented.

Similarly, the National President of All Farmers Association of Nigeria (AFAN), Mr. Kabir Ibrahim, explained that the skyrocketing price situation in the country is a catch 22 now because government cannot buy from the open market as such action will exacerbate the current inflation tide.

“We cannot also import grains as every country is facing the same crisis as a result of Russia and Ukraine who are at war with each other,” he said.

He, therefore, called on the federal government to support and encourage farmers to scale their productivity levels to produce all year round instead of adopting a wet season production.

“The only option open to us is to scale our productivity and produce all year round instead of doing wet season production. I see a closely monitored and periodically implementation of the recently declared emergency on food security becoming the required game changer,” he averred.

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