Which of the following goods or services would likely have the most elastic demand?
Select one: A. gasoline from the BP gas station on the corner of 3rd and Fair streets in Marquette. B. physician services C. cigarettes D. gasoline
The correct answer and explanation is:
The correct answer is A. gasoline from the BP gas station on the corner of 3rd and Fair streets in Marquette.
Elasticity of demand refers to how sensitive the quantity demanded of a good or service is to a change in price. A good is said to have elastic demand if consumers will significantly change their quantity demanded in response to price changes. In contrast, inelastic demand means that price changes have little effect on the quantity demanded.
Let’s break down why gasoline from a specific station is more elastic compared to the other options:
- Gasoline from a specific station: Gasoline has many substitutes. If the price of gasoline at the BP station increases, consumers can easily switch to other nearby stations that may offer a better price. This availability of alternatives makes the demand for gasoline from a specific station more elastic. Consumers have flexibility in choosing where to buy gasoline, so a price increase at one station can lead to a noticeable drop in demand.
- Physician services: The demand for physician services is generally inelastic. People usually need medical care regardless of price, especially for essential or urgent medical conditions. While price changes might affect the timing or frequency of visits, they won’t significantly affect the demand for these services in the short term.
- Cigarettes: Cigarettes are another example of inelastic goods. Though smoking might be harmful and expensive, many consumers continue to buy cigarettes even if prices rise, particularly if they are addicted. This makes the demand for cigarettes less elastic compared to goods with easily accessible substitutes.
- Gasoline (generic): While gasoline is typically considered inelastic because it is a necessity, the overall market for gasoline lacks the flexibility seen in the specific example above. Since gasoline is a necessary product for car owners, and many people have limited substitutes, demand tends to be less elastic on the whole.
In conclusion, the elasticity of demand is greatest when there are many close substitutes available for a product, and this is the case with gasoline from a specific location, where consumers can quickly find alternatives if the price rises.