Price Discovery Essay

The demand for caviar D for Jane is perfectly inelastic, since she buys the same amount at any cost (see figure 1). However, once the price for caviar increases, the total spending on caviar increases, reducing the income available for hot-dog consumption. With a lower income, Jane’s demand curve for hot-dogs shifts inwards from D1 to D2, indicating a decrease in consumption of hot-dogs at all price levels. Since the accident in Chernobyl hasn’t affected the price of hot-dogs P, Jane’s consumption decreases from A to B, as shown in figure 2. The concept of price elasticity of demand shows the extent to which the quantity demanded for a certain product changes once the price changes. In general, an increase in price decreases the quantity demanded. However, the more crucial the consumption of a good is, the less elastic the demand for this product is relative to the change in price. Thus, salt is often considered a necessity, which is needed for human nutrition. Therefore, people will attempt to buy it at any cost. Moreover, the percentage of income spent on salt is so small, that a price increase will not affect the income situation considerably. Therefore, the quantity of salt demanded will not change significantly with the price change. The demand curve in this case is nearly vertical, indicating price elasticity close to 0. On the other hand, education in private schools is a luxury good. The cost of it takes up a large proportion of the disposable income; therefore people will be very attentive when purchasing it, due to a substantial income effect. Moreover, private education has public education as a cheaper substitute; therefore consumers will likely give up private schools with a price increase. This fact indicates high price elasticity of demand for private school education.