Question

Briefly explain whether the demand for each of the following products is likely to be elastic or inelastic: a. Milk b. Frozen cheese pizza c. Gasoline d. Prescription medicine

Short answer

a. Milk - Inelastic, b. Frozen cheese pizza - Elastic, c. Gasoline - Inelastic, d. Prescription medicine - Inelastic

Step-by-step solution

Identify the category of the good - Milk

Milk is considered a necessity product which is consumed on a daily basis and has few substitutes available. Therefore, the demand for milk is predicted to be fairly inelastic since changes in price would likely see only minor changes in the quantity demanded.

Identify the category of the good - Frozen cheese pizza

Frozen cheese pizza is not a necessity, there are many substitutes (other types of prepared or fresh foods) and is not something that is typically consumed every day. Therefore, the demand for frozen cheese pizzas is likely to be elastic as changes in price could lead to significant changes in the quantity demanded.

Identify the category of the good - Gasoline

Gasoline is a necessity for many people, especially those who need it for transportation to work or other essential activities and there aren't many immediate substitutes available. Therefore, the demand for gasoline is predicted to be relatively inelastic since most motorists will still need to buy gasoline, even when the price rises.

Identify the category of the good - Prescription medicine

Prescription medicine is usually a necessity for those who need them, with no close substitutes. Thus, the demand for prescription medicine is likely to be inelastic since a change in price will likely not lead to a significant change in the quantity demanded, as people need their medicines regardless of price.

Key concepts

Necessity Goods

Necessity goods are products that are essential for our daily life. These include items like milk, gas, and prescription medicine. Since they are crucial, people tend to buy them regardless of price fluctuations. This characteristic makes the demand for necessity goods inelastic. Even if prices go up, people still buy nearly the same quantity. For example, regardless of a price increase, most people will still need to purchase milk or gas. This necessity creates a low sensitivity to price changes.

Substitutes

Substitutes refer to goods that can replace each other. When a product has many substitutes, it tends to have elastic demand. This is because consumers can easily switch from one product to another if the price changes. For instance, frozen cheese pizza has many substitutes like other snacks or meals people can choose from. As a result, if the price of frozen cheese pizza increases, people might buy less of it and opt for a cheaper alternative. This shows how the availability of substitutes can lead to significant changes in the quantity demanded when prices vary.

Quantity Demanded

Quantity demanded is the amount of a product that consumers are willing to buy at a given price. It varies depending on whether the good is a necessity or has substitutes available. For necessity goods, changes in price typically result in minor changes in quantity demanded, indicating inelastic demand. For instance, even with a price increase, the quantity demanded for prescription medicine might remain stable because people need it. However, for goods with many substitutes, like frozen cheese pizza, quantity demanded is sensitive to price changes, reflecting elastic demand. A small price increase could cause a noticeable drop in quantity demanded.

Price Changes

Price changes affect the demand elasticity of different products. In economics, elasticity is about how much the quantity demanded will change when there's a price change. Inelastic demand implies that the quantity demanded barely changes with price shifts, common with necessities. For goods like gasoline, even if prices rise, the demand may not drop significantly because people need fuel for commuting. Conversely, elastic demand means that price changes significantly influence quantity demanded, typical for non-essential goods. If the price of frozen cheese pizza rises, people may buy less, as they find cheaper alternatives.