Guo (2012) gives the explanation for the concept of price elasticity of demand. It is simple and, when you think of it, obvious. With a very few exceptions, price increases will drive demand down. Interestingly enough, the controversy over EpiPens in the news today provides a good example of price elasticity of demand. The classic example is a drug addict or the slightly less addicted cigarette smoker. Price was essentially irrelevant to demand to these groups of consumers.
The converse condition is also, then, true. Products that are commodities are essentially perfectly price elastic. Gas wars, for example, are fought over pennies a gallon. Bread on supermarket shelves is sold within pennies per loaf and millions of dollars are spent on advertising to promote some level of brand loyalty. Brand loyalty, in turn, generates some small amount of inelasticity. Similarly, computers have become near-commodities and price is a determinant rather than brand. When a Dell or an Asus or a Samsung are essentially identical there is no reason to pay a premium. The days of IBM commanding loyalty are gone although Apple still has some loyalty.
The EpiPen is a present-day example of a product with similar characteristics. Having an EpiPen available can literally be a life-or-death condition. The EpiPen is an example of another subset of markets, a monopoly. Hawks (2015) reminds us that, at bottom, a monopoly exists when one firm controls an entire market. A true monopoly requires that the product in question have no alternative. In the case of the EpiPen there are alternatives. The monopoly is the injection device, not the drug itself. Swetlitz explains that even in the case of this monopoly there is price elasticity of demand. Consumers and professionals are turning to syringes pre-loaded with doses rather than the mechanical delivery system that makes the EpiPen the EpiPen.
Pettinger (2015) provides the relevant formulas to calculate elasticity. Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price. For the laptop example given then, the PED = 40% Change in Quantity Demanded / 20% Change in Price giving the PED of 2. For the cigarette example the same formula yields a PED of .5. This is intuitive given that, as noted above, the computers are basically a commodity with plenty of substitutes available while cigarettes approach being a necessity for those addicted.
Elasticity of demand is a very important consideration for a business. Guo (2012) details how elasticity drives business pricing decisions. Businesses test markets regularly. Businesses with a less elastic price resistance can charge more. In a free market suppliers are price takers and market equilibrium will be achieved, in theory, when costs of production (including profit) equal income. Elasticity changes those factors to a greater or lesser degree depending on the PED.
Bridge tolls, for example, are relatively inelastic. There are limited ways to cross that river and if you need to get to the other side you will pay the price. If the price goes too high then a ferry boat will start operating or another bridge will be built. But given the capital investment requirement involved it would take a significant opportunity to lure competition into the market.
Beachfront property is quite inelastic. It is rare, there is no substitute, and there is no more being produced. If you want an ocean view you have no choice but to pay the price. If you are willing to live within a few minutes of the ocean but do not require the actual beach front location, then you leave the realm of the monopolist who holds the beachfront property and enter the more open market.
Gourmet coffee is an interesting mix. The “coffee” part of “gourmet coffee” has practically unlimited substitutes. Folgers makes a perfectly good coffee, for example, that amounts to a few cents a cup. For those who have developed the taste though, price becomes quite inelastic. Whether you find yourself needing your morning Starbucks cup of double latte, light foam, stick of ginger and light brown sugar, or watched The Bucket List and now just cannot accept anything less than Kopi Luwak, your elasticity is completely up to you. If you are willing to pay the price, pay the price. But you have options.
Gasoline is a commodity. No matter how much Phillips 66 advertises their benefits over Shell, your car will run just fine on either. Your manufacturer may recommend “premium” and in that case you will pay extra for that. But you can get your “premium” at any station you pass. The exception is if you can find a station that sells alcohol-free fuel. If you care about your outdoor power equipment you will pay that premium. In fact, Briggs and Stratton sells such fuel through its dealerships. It is expensive but it is distinguished from the other fuels, virtually all of which have some ethanol.
Cell phones fall somewhere along the PED spectrum depending on personal preferences. Apple users are persuaded of the superiority of that product and pay a premium. Other manufacturers such as Samsung work hard to develop that kind of brand loyalty. For many, though, a $15 prepaid TracPhone from WalMart suffices. If you want all of the features, email and internet, GPS and music functions you will pay a premium and likely have your preference in brand. If all you want is a way to make the occasional phone call you can get by with that basic phone that is, like so much in electronics, essentially a commodity in 2016.
Finally, regarding the flower business, there are certainly elasticities involved. Indeed, the demand approaches being perfectly elastic. No one really needs flowers. Given that there are florists in even the smallest towns though, the evidence is that there is, indeed, a market. For a bride planning a wedding, price is a consideration but you can rest assured that there will be flowers in the wedding. When a loved one passes away funeral flowers are in very high demand. There is seasonality as well. It is no surprise that florists can raise prices the second week in February with no consequence. Similarly, the May/June prom season will be a very busy time for florists.
References
Ethanol Free Fuel. (2016). Briggsandstratton.com. Retrieved from https://shop.briggsandstratton.com/us/en/canned-fuel
Guo, V. (2012, Aug. 21). Price Elasticity 101: The Necessities and Your Pricing Strategy. priceintelligently.com. Retrieved from http://www.priceintelligently.com/blog/bid/154374/Price-Elasticity-101-The-Necessities-and-Your-Pricing-Strategy
Hawks, D. (2016). What is A Monopoly in Economics? - Definition and Impact on Consumers. study.com. Retrieved from http://study.com/academy/lesson/what-is-a-monopoly-in-economics-definition-impact-on-consumers.html
Pettinger, T. (2015). Price Elasticity of Demand. economicshelp.org. Retrieved from http://www.economicshelp.org/microessays/equilibrium/price-elasticity-demand/
Swetlitz, I. (2016, July 6). High Price of EpiPens Spurs Consumers, EMTs to Resort to Syringes for Allergic Reactions. statnews.com. Retrieved from https://www.statnews.com/2016/07/06/epipen-prices-allergies/
Wieczner, J. (2016, Aug. 25). What Mylan’s EpiPen Cost Scandal Says About the Drug Price Problem. Fortune. Retrieved from http://fortune.com/2016/08/25/epipen-mylan-cost-coupon/
