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THE COMMON ROOM By George Wilmot
Page 124
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Lecturer in Transport Studies University of London
Economic Terms and their Relevance to Transport 3. ELASTICITY OF DEMAND
A FAVOURITE concept of the economist is the "demand curve ", which indicates the expected demand for particular goods or services at each of a series of hypothetical prices. The concept is based on the assumption that all conditions other than price are constant. Thus it is assumed that people's incomes are constant, their tastes unchanged and the political climate unaltered since the date of drawing up the curve. Quantity demanded is shown as a function of price.
Elasticity of demand—or more accurately, price elasticity of demand—measures the response of the quantity demanded to changes in price. It indicates the relative change in the amount demanded in response to a small relative change in price on a given demand curve. This is: percentage change in the amount demanded
-nail percentage change in price
There are three degrees in elasticity: I. Where a small percentage drop in price leads to a proportionate increase in the amount demanded, elasticity of demand is equal to one—for example, one per cent one per cent 2. Where a small percentage drop in price leads to a t.reater percentage increase in the amount demanded, elasticity of demand is greater than one—for example, two per cent one per cent 3. Where a small percentage drop in price leads to a smaller increase in the amount demanded, elasticity of demand is less than one—for example, half per cent one per cent The demand for cigarettes may be regarded as highly inelastic—to the joy of every Chancellor of the Exchequer. The demand for space on a commercial vehicle or a bus may be regarded as highly elastic—if the haulier puts up his rates or the bus fares are increased traffic will be lost to competitors. Why is elasticity so different in these two cases? What determines the elasticity of demand for a commodity or service?
Demand tends to be elastic where: (a) substitutes are available. For example, car rides may be substituted for bus journeys if fares are raised; (b) the commodity or service is in the luxury class, the price of the commodity or service being high in relation to income. For example, the demand for cars; (c) the purchase can be postponed and the commodity can be used for a longer periOd. For example, the demand for durables like commercial vehicles, buses or cars.
Demand tends to be inelastic where: (a) the commodity is jointly demanded with another much more expensive one. For example, the demand for steering wheels is insensitive to changes in their price; (b) the proportion of income spent on a commodity or service is low. For example, the demand for lubricating oil; (c) no substitute is available. For example, the demand for .a taxi late on a wet night; (d) the purchase cannot he postponed. For example, the demand for commuter transport.