The Turbo Man toys are in short supply because of strong demand. However, related items, like Turbo Man’s pet sidekick, Booster, are readily available.
Questions: Using the determinants of elasticity, figure out the following: Which good has the more relatively inelastic demand: Turbo Man or Booster? Why?
What are some examples of elasticity that you have experienced in your life? For example, have you noticed a change in your consumption of a good when the priced changed? Were you elastic or inelastic and why?
One experience I had recently was an increase in the price of our dog's food, which did not change my consumption at all. This shows my demand is highly inelastic for this product. The reason for this is because our dogs are on a special diet (grain free, weight control, senior formula) so there are very few close substitutes available. Also, because their food is a relatively small portion of our total budget my demand is inelastic.
The Correct Answer and Explanation is :
To determine which good has the more relatively inelastic demand—Turbo Man or Booster—we need to apply the determinants of elasticity. The price elasticity of demand (PED) measures how responsive the quantity demanded of a good is to changes in its price. A more inelastic demand means that consumers’ purchasing decisions are less sensitive to price changes.
Factors Affecting Elasticity:
- Substitutes: Goods with fewer substitutes tend to have more inelastic demand because consumers cannot easily switch to another product if the price rises.
- Necessity vs. Luxury: Necessities tend to have more inelastic demand since consumers still need to purchase them even if the price increases. Luxuries tend to have more elastic demand.
- Time Horizon: In the short term, demand tends to be more inelastic because consumers need time to adjust their behavior.
- Budget Share: Products that make up a small proportion of a consumer’s budget tend to have inelastic demand because price increases don’t significantly impact overall spending.
Which Good is More Inelastic?
Turbo Man, the toy, likely has more inelastic demand compared to Booster, the sidekick. This is due to the following reasons:
- Fewer Substitutes for Turbo Man: Turbo Man is a specific, highly sought-after toy, especially when in short supply during peak demand times (e.g., holiday season). Consumers may be less willing or able to switch to a different toy because of its unique features or the demand for it.
- Booster Has More Substitutes: Booster, being a related sidekick, likely has more substitutes available. Consumers may find other similar action figures or toys to satisfy their desires, making Booster’s demand more elastic.
Your Example of Inelastic Demand:
Your experience with the dog’s food is a great example of inelastic demand. Even though the price of the food increased, you did not reduce your consumption because the product is a necessity for your pets and there are few substitutes that meet their specific dietary needs. Additionally, since the food is a relatively small portion of your total budget, the price increase doesn’t significantly impact your overall spending. This shows that your demand for dog food is inelastic, as the necessity and lack of close substitutes make you less responsive to price changes.
In conclusion, Turbo Man likely has a more inelastic demand than Booster, and your experience with the dog food highlights how necessity, lack of substitutes, and budget share influence the elasticity of demand.