Elasticity is also an important concept that plays a vital role in every day activity. Elasticity as a concept is defined as the extent to which the demand or even the supply of a particular product changes at a given time to the change in price. A product is considered to be highly elastic if its consumers become highly sensitive to the price once it increases or decreases, and the change in price has an immediate impact on the quantity demanded (Imbs and Mejean 2015). For example, when the price of Coca Cola increases, the demand for Coca Cola will be elastic, as there are various other easy substitutes such as Pepsi available in the market. Hence, the change in price would lead the consumers to switch to a rival brand like Pepsi.
However, even if the price of gasoline increases at a steady rate, people will have less alternative to switch to, and hence they are likely to stick to the product consumption even if the price goes higher than expected. Now, the more inelastic a product is, the higher can be the profit of the company. Although the cigarettes are highly injurious products, and the same is known to its consumers, these being the addictive products, will never experience drop in demand with a rise in price. This is exactly why the government imposes a huge tax on these products, as even huge taxation will not control or reduce the demand of such items. This helps the government to discourage the consumption of such items, and if it cannot be discouraged, it helps in increasing their revenue that can be spent for public expenditure.
On the other hand, essential products like tap water are demanded by all, and if left to private companies, these companies can deliberately raise the price after reducing the supply. Hence, the government regulates the supply of essential commodities like water. However, there are certain factors that determine the elasticity of demand of a particular product, and income of the consumer, necessity of the product or the number of substitutes available in the market determine the same (DeCicca and Kenkel 2015). If a product is absolutely indispensable then he will continue to buy the product even if the price goes high, as the consumption of such a product will ensure his sustenance.
DeCicca, P. and Kenkel, D., 2015. Synthesizing Econometric Evidence: The Case of Demand Elasticity Estimates. Risk Analysis, 35(6), pp.1073-1085.
Imbs, J. and Mejean, I., 2015. Elasticity optimism. American Economic Journal: Macroeconomics, 7(3), pp.43-83.
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