by: Brittany Anderson
What do economics and rubber bands have in common? They both deal with elasticity. Anyone who has ever tried to stretch a rubber band beyond its comfortable limit has likely experienced the pain as it snaps in his or her fingers. In economics, a similar experience is witnessed when sellers try and force too high of prices on their customers and face the resulting backlash of lost business (which presumably can be even more painful). Price Elasticity of Demand is technically defined as “The percentage change in quantity demanded resulting from a given percentage change in price” (Goolsbee, Levitt, Syverson 2016). Beyond the economic jargon of this definition lies a very useful tool for observing shopper’s purchasing habits and their respective limits.
For the purpose of this article, lets ignore any mathematical feats and focus on the terminology. The first term price is self-explanatory. In this instance it refers to the amount of money a shopper trades for a good. It is helpful to think of the second term- elasticity- as how flexible a shopper’s tolerance is for price adjustments. Imagine a rubber band. The rubber band is described as elastic if it is easily stretched (i.e. responsive to change), and inelastic if it is relatively stable (i.e. unresponsive to change). The final term demand refers to how much of any particular good a shopper wishes to buy for a given price point (i.e. if apples cost $1, a shopper may wish to buy five). Putting all three terms together forms a working definition of price elasticity of demand; the change in amount of goods a shopper wishes to purchase if the price rises or falls.
Picture a fictional shopper named George. George loves apples and buys seven apples a week so he can have one everyday for breakfast no matter how much he has to pay. So when apples each cost $1, he buys seven, when apples each cost 50 cents he still buys seven, and when apples each cost $10 he even still buys seven apples. George’s demand for apples is inelastic; his desire for apples is independent of their price, this makes George a sturdy guy. Referring back to the rubber band analogy, the sellers can pull George as hard as they wish in any direction and expect to keep their relationship as George’s breakfast supplier.
Now consider a second shopper named Luke. Luke also likes having apples for breakfast, but unlike George, he is willing to switch to oranges for breakfast if the price of apples becomes excessive. When apples each cost 50 cents, Luke buys seven apples, when apples each cost $1, Luke buys four apples and three oranges, when apples each cost $10, Luke buys no apples and seven oranges. Luke’s demand for apples is elastic, the amount of apples he buys changes depending on their price. Luke is flakey. Because of his flexibility, the apple sellers only have to pull Luke slightly in either direction and they break their business relationship with him as Luke leaves them for the Orange seller.
Just like we learn not to stretch elastic band beyond their limits, sellers learn not to stretch their customers beyond their limits using price elasticity of demand.
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