Essay: The elasticity of demand (example: cars)

The elasticity of demand ( as explained by investopedia.com ) “ is calculated by dividing the percent change in quantity demanded by the percent change in price” . If the elasticity quotient is greater than or equal to one the demand is deemed as elastic and if the elasticity quotient is less than one the demand is deemed as inelastic.
For a product to be elastic, it would mean that the change in demanded quantity would be large if the price was to change. For a product to be inelastic, the change in demanded quantity would be small if the price was to change.
Depending on the type of car, it could either be elastic or inelastic, for example if the car has a special feature it would make it more inelastic than the general car.
This can be explained through the example of hybrid cars. For examples, If Toyota builds the first hybrid, they could charge a price which suits them , making it inelastic and because they are the only producer consumers would be forced to agree to their price. However after a while a rival manufacturer such as Ford sees Toyota\’s success and also builds hybrids. If Toyota continues to raise prices, then people will purchase Ford hybrids instead because they are cheaper.
The price elasticity of demand measures how much the quantity which is demanded fluctuates with the price. Some of the factors which affect the price elasticity of demand are; substitution, degree of necessity, duration of price change and brand loyalty.
The more possible substitutes there are for a given good or service, the greater the elasticity. When several close substitutes are available, consumers can easily switch from one good to another even if there is only a small change in price. If no substitutes are available, demand for a good is more likely to be inelastic. There are many substitutes for a particular car as there are not only many different manufacturers and brands, there is also the option of using public transport. This means that with respect to substitutes, the elasticity is higher.
Proportions of the purchaser’s budget also plays a part in the demand in price of the elasticity. Products that consume a large portion of the purchaser’s budget tend to have greater elasticity. The relative high cost of such goods will cause consumers to pay attention to the purchase and seek substitutes. In contrast, demand will tend to be inelastic when a good represents only a negligible portion of the budget.
Cars are a purchase which last a long period of time and so are called consumer durables. When a price of a product first changes, consumers are more responsive to price change and so the demand is elastic. However a consumers is less likely to buy another car until their car wears out and buying a car becomes a necessity, this makes the demand of cars price inelastic.
The greater the requirement for a product or service leads to lower elasticity. Consumers will attempt to purchase essential products not considering of the price. Luxury products, tend to have larger elasticity. However, some goods that initially have a low degree of necessity are habit-forming and can become necessities to consumers. This again differs for different cars, luxury cars will have greater elasticity.
The duration of the price also affect the elasticity of the product. Non-durable products , have greater elasticity over a long period of time. In a short period of time it can be difficult for customers to find substitutes to combat the price change, however over longer periods of time the customers are able to research into substitutes and change their behaviour. An example of this is a sudden increase in fuel , consumers may continue to pay the higher prices for fuel in the short term, however after seeing the impact of the cost, they may decide to find alternatives such as public transport, carpooling, or buying more fuel-efficient vehicles over a longer period of time. However, this tendency does not hold for consumer durables. The demand for durables tends to be less elastic, as it becomes necessary for consumers to replace them with time.
The loyalty which some consumers have to a certain brand affects the elasticity of price of a certain product or service. An example to this is Apple; many people only buy apple products because of Apple’s reputation and brand loyalty. The fact that people have this connection to brands can countermand sensitivity to fluctuations in prices. This loyalty to brands leads to inelastic demand.
The demand for cars can be both price elastic or inelastic this is because all cars are different and depending on the different factors and different criteria, so depending on the certain make, model and type of car, the demand would be different. For example a leading brand such as Tesla which is in high demand, if the price of the Tesla was to change, or increase, the demand for the Tesla would not decrease by a vast amount and so the change in quantity of demand would be small and so it would be inelastic.