Theory of Consumer Behaviour
Elasticity: causes and expenditure
Predict how spending changes when price changes.
What makes demand more or less elastic?
- Nature of the good: necessities like food have inelastic demand (people buy them anyway); luxuries have elastic demand.
- Close substitutes: a good with close substitutes has more elastic demand. Demand for one particular variety of pulses is elastic, because buyers switch easily to another variety; demand for food as a whole is inelastic.
Elasticity tells us what happens to expenditure (price × quantity) when the price changes:
| Demand | When price rises, expenditure |
|---|---|
| Elastic | falls (moves opposite to price) |
| Inelastic | rises (moves in the same direction) |
| Unit elastic | stays the same |
Approximately, ΔE ≈ Δp × q × (1 + eD), where eD is negative.
Example: demand for salt is very inelastic, eD = −0.1. If its price rises by 10%, quantity falls by only about 1%, so spending on salt rises by about 9%.
Elastic: spending moves against price.
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