Question

FreshLeaf is a commercial salad maker that produces "salad in a bag" that is sold at many local supermarkets. Its customers like lettuce but don't care so much what type of lettuce is included in each bag of salad, so you would expect FreshLeaf's demand for iceberg lettuce to be: a. Elastic. b. Inelastic. c. Unit elastic. d. All of the above.

Short answer

The demand for iceberg lettuce is inelastic since customers are indifferent to lettuce type.

Step-by-step solution

Understanding Elasticity

Elasticity in economics refers to how sensitive the quantity demanded of a good is to a change in its price. If a small change in price leads to a large change in the quantity demanded, demand is considered elastic. If demand changes only slightly when price changes, it is inelastic.

Identifying Customer Preferences

According to the problem, the customers of FreshLeaf are not particular about the type of lettuce, suggesting they do not react strongly to changes in type. This implies a potential low sensitivity to price changes of iceberg lettuce specifically since any lettuce type suffices.

Assessing Demand for Iceberg Lettuce

If customers are indifferent about the type of lettuce and primarily care about having lettuce rather than what kind, the demand for iceberg lettuce itself is less likely to change significantly when its price changes. This makes the demand inelastic.

Key concepts

Demand Elasticity

Elasticity in economics is a measure of how much consumers respond to changes in price or other economic variables. When it comes to **demand elasticity**, it's all about how quantity demanded reacts when price changes. It can be categorized primarily into three types:

• **Elastic Demand**: Here, even a small change in price leads to a large change in the quantity demanded. Think luxury goods, where price drops make consumers jump at the chance to buy more.
• **Inelastic Demand**: A change in price results in little to no change in the quantity demanded. This typically applies to necessary goods, like gasoline or basic groceries.
• **Unitary Elasticity**: The quantity demanded changes proportionally with the price change.

For **FreshLeaf’s customers**, who aren't picky about lettuce type, the demand for iceberg lettuce is likely inelastic. This all means that even if the price dropped or rose, they wouldn’t rush to change their purchasing habits dramatically.

Price Sensitivity

**Price sensitivity**, or how much demand changes with a price variation, hints at how much value consumers place on a specific product. If consumers are very responsive when prices change, they are considered price-sensitive. On the flip side, if they keep buying regardless of price shifts, they are price-insensitive.

In contexts like the FreshLeaf exercise, understanding **price sensitivity** helps businesses like them determine appropriate pricing strategies. Since FreshLeaf’s customers don’t worry about specific lettuce types, it means their price sensitivity towards iceberg lettuce is low.

Several factors influence price sensitivity:

• **Substitutes' Availability**: If many substitutes exist, consumers might quickly shift when prices change for the product.
• **Necessity vs. Luxury**: Essential items often have lower price sensitivity.
• **Income Level**: Higher income can reduce sensitivity, as changes in price affect their overall budget less.

In this case, because the customers are indifferent to lettuce type changes, they are not highly sensitive to iceberg lettuce prices.

Inelastic Demand

**Inelastic demand** occurs when changes in price bring about little to no change in the quantity of a product demanded. It's like having your favorite restaurant; even if prices increase slightly, you might still go for your beloved dish.

When a product shows inelastic demand, it means:

• Consumers continue purchasing despite price hikes.
• There's a lack of ready substitutes, so buyers decide to stick with what's available.
• It's usually a necessity, rather than a luxury.

For **FreshLeaf** salad bags, even if iceberg lettuce's price changes, customers’ demand won't vary much, illustrating this concept. It doesn't matter if it's romaine or iceberg lettuce inside, the demand remains mostly unaffected by price changes. Understanding **inelastic demand** helps companies maintain stable sales despite market fluctuations. For essential goods like these, businesses can focus more on consistent supply and quality rather than price changes.