Question

Does quantity demanded always fall if the price rises? List several goods or services that you think would remain in demand even if the price rose sharply. Why does demand for those items change very little? (You will learn more about this topic in Section \(3 .\)

Short answer

Demand does not always decrease with price increases; inelastic goods like necessities remain in demand because they are essential and lack substitutes.

Step-by-step solution

Understanding Elasticity of Demand

Elasticity of demand refers to how sensitive the quantity demanded of a good is to a change in its price. If demand is sensitive to price changes, it is considered elastic. Conversely, if demand is relatively insensitive to price changes, it is inelastic. Not all goods have the same elasticity.

Identify Inelastic Goods

Inelastic goods are those for which demand remains relatively constant, even when prices rise. Common examples include basic necessities, such as water, electricity, and insulin. These goods are essential, and consumers will continue to purchase them despite price increases.

Explain Why Demand Remains Steady

The demand for inelastic goods changes very little with price variations because these goods are either necessities that consumers cannot do without or have few or no substitutes. For instance, life-saving medications, essential food items, and utilities like gas and electricity fall into this category.

Conclusion on Demand Changes

Thus, the quantity demanded does not always fall with rising prices, especially for inelastic goods or services. Consumers prioritize these goods and often find it necessary to maintain their consumption despite cost escalations.

Key concepts

Inelastic Goods

Inelastic goods are items whose demand does not significantly decrease even when prices rise. These could include essential products like water, electricity, and medications such as insulin. These goods are critical for daily living and often have no close substitutes, making them indispensable.
Consumers continue to purchase these items because they are vital; going without them could significantly impact quality of life or health.
The elasticity of a good depends largely on how essential it is as well as its available alternatives. When few or no substitutes exist, the demand remains steady because people don't have other options to turn to.
This characteristic makes certain goods inelastic, ensuring relatively constant demand regardless of price hikes.

Price Sensitivity

Price sensitivity measures how much the quantity demanded of a good responds to a change in price. Highly sensitive or elastic goods experience a noticeable change in demand when prices fluctuate. In contrast, inelastic goods have minimal demand change with price variations.
Price sensitivity stems from several factors, such as:

• The availability of substitutes
• The necessity of the good
• The percentage of income spent on the good

When substitutes are plentiful, or items are not crucial, consumers tend to be more sensitive to price changes.
However, if a product like life-saving medication has no substitutes and is essential, buyers are less responsive to price increases.

Necessities and Substitutes

Necessities are goods that people need for everyday life and survival, regardless of price changes. These include basic commodities like food, water, shelter, and essential medications.
Necessities are often inelastic because they are required for basic functioning, leaving consumers with little choice but to purchase them even when prices rise.
Substitutes play a crucial role in determining the elasticity of demand for a good. If there are readily available substitutes, consumers can switch products when prices increase, making the original product more elastic in demand.
In the absence of substitutes for a necessity, the demand for that good remains inelastic since consumers have fewer options to replace it.