Can price elasticity of demand change over time?

1 Answer
Dec 24, 2015

The very concept of elasticity shows it depends on the price elasticity value of the good.


First of all, let's just clarify that for common goods (with #0 < |e| < 1#) the elasticity is really hard to be changed, as we're dealing with goods whose demand reacts less than proportianlly to changes in prices.

For example, if water prices doubled or halved people would not demand more or less water substantially enough to deeply change market supply/demand equilibrium. The same with goods that are essential in some quantity and rarely more or less than in that quantity. So, this price elasticity of demand - the one for common goods - sounds pretty unchangeable through time.

However, things start to differ when we deal with inferior goods or luxury goods, which price elasticity has an absolute value superior to 1. We may think, at first, that price elasticity of demand is a given relation, that stays fixed, but it actually can - also by the definition of demand itself - change.

We must bear in mind that demand, in theoretical and mathematical terms, is function of the price of the good, the price of other good(s) and also of income, as exemplified by the formula #x(p_x, p_y, I)#. So, if income varies, then the quantity demanded will vary - possibly - regardless of changes in prices. This gives way to infer that, for inferior or luxury goods, price elasticity of demand is flexible - or, ate least, less inflexible than the one for common goods.

Last but not least, we must also understand "who" is the demand we're talking about? Is it an individual/company alone? Is it a group, a class? Is it the whole market? The greater the span, the more subtly changes will take place.