Price elasticity of demand means the extent to which the demand of the commodity would change if it price is altered. The relationship between the price elasticity of demand and slope of demand curve is an inverse one i.e. the greater the gradient of the curve, the lower the elasticity of demand and vice versa (Krugman and Wells 145-153). Price elasticity of demand of a product is dependent on various factors which also depend on the product in question. In this essay, the price elasticity of coffee is taken as the case study. The aim is to investigate the factors that affect price elasticity of demand of coffee. These factors are discussed below.
The availability of substitutes
Substitute with regards to the price elasticity of demand refers to the ease in which a consumer can substitute the consumption of a good with another (Carbaugh 58). In case of coffee, there are so many substitutes that one would shift consumption to incase the price of coffee become unaffordable. For instance, tea is a close substitute for coffee and people would shift their consumption to tea should the price of coffee increase. The demand of coffee would decrease if its price increase but that will also increase the demand of a close substitute, tea. The availability of close substitute will make the demand of coffee to be very elastic; that is a small change in price will cause more than proportionate change in demand of coffee.
The specific nature of the good
The nature of a good depends on the purpose it serves in the life of the consumer. Some commodities are needed for survival of consumers (basic needs) while others are needed to make life comfortable (luxuries). It also depends on whether the good is normal or abnormal. For normal goods, their demand are inversely related to changes in price while otherwise applies to abnormal goods. Coffee is a normal good and is a necessity to some people while it is a luxury to others. For necessities, they do not change much with the change in their price because people will have to consume the same amount even if the price increases. For luxuries, their price elasticity of demand is inelastic. People will stop consuming luxuries when their prices increase and vice versa.
The part of income spent on the good
The amount of income set aside for the purchase of a given good is referred too as the disposable income of that good. If less income is allocated to a given commodity, the price elasticity of demand will be more elastic. If the price of the commodity increases, people will not be willing to allocate more income to that and they d not have much money to buy the commodity (Sexton 174). For coffee, people do not allocate more income to its purchase and therefore it is price inelastic.
The time consumers have to buy the good
The time available to the consumer to buy the commodity also has a impact on the price elasticity of demand. The more the time consumers have to buy a commodity the more elastic is the price elasticity of demand. The tastes and preferences of people changes with time and therefore they may not be interested in the commodity. At this point, the price elasticity of that commodity will be elastic. If the commodity is needed to serve the immediate need, the price elasticity becomes less elastic (Krugman and Wells 145-153). Coffee is needed to serve immediate need and May also be habit forming such that in the absence of close substitute, the price elasticity of coffee is less elastic. People will have to consume it despite the price changes.
The effect of current supply and current demand of a dress leads to an equilibrium state. In this case, both the producers and the consumers are consumers are satisfied and there is no pressure in price changes. In this particular situation, no economic forces of excess demand and excess supply are being generated to change the situation.
Carbaugh, Robert. Contemporary Economics: An Applications Approach.London:M.E. Sharpe, 2010.
Krugman, Paul and Wells, Robin. Economics.New York: Worth Publishers, 2009.
Sexton, Robert. Exploring Economics. London: Cengage Learning, 2010.