Today's Question
Price elasticity of demand measures how SENSITIVE buyers are to price changes. If a 10% price increase causes a 20% drop in quantity demanded, demand is 'elastic' (sensitive). If the same increase only causes 5% drop, demand is 'inelastic.' Why is demand for insulin inelastic while demand for a specific brand of bottled water is elastic?
Model Answer
Insulin: Diabetics NEED it to survive - they'll pay almost any price. No good substitutes, it's a necessity. Demand barely changes with price. Bottled water brand: Many perfect substitutes (other brands, tap water). If Evian raises prices 10%, consumers simply buy Dasani. They're very price-sensitive. Key factors: availability of substitutes, necessity vs luxury, and time horizon (people adapt more over time).