Lesson preview · Applying Ped
Why Elasticity Varies
~8 min · Free to read
Why is the demand for insulin inelastic but the demand for Pepsi elastic? Why can gas stations raise prices overnight but airlines run constant sales? The PED formula tells you what elasticity is. The five determinants tell you why it differs across goods.
Key Term
The 5 Determinants of PED
- Substitutes — more substitutes → more elastic
- Necessity vs luxury — necessities inelastic, luxuries elastic
- Time horizon — longer time → more elastic
- Proportion of income — bigger budget share → more elastic
- Narrow vs broad definition — narrow categories more elastic
Tip
Mnemonic: SNAP-N
Substitutes, Necessity, Adjustment time, Proportion of income, Narrow definition. Five factors — walk through them in order on any good and the answer falls out.
1. Substitutes — the single most important factor. If consumers can easily switch, a price hike sends them running. Butter has margarine → elastic. Insulin has nothing → inelastic. The more alternatives, the more elastic demand.
2. Necessities vs luxuries. Necessities (insulin, water, gas to get to work) tend to be inelastic — you can’t just stop buying them. Luxuries (sailboats, designer watches, vacations) are elastic — if the price jumps, you live without them.
3. Time horizon. Demand gets more elastic the longer consumers have to adjust. Gas prices spike today? Short run, you still drive to work (inelastic). Over years, you buy a hybrid, move closer, carpool — demand becomes elastic.
4. Proportion of income. Goods that take a big chunk of budget (rent, cars) tend to be elastic — a 10% hike really hurts. Goods that barely register (salt, matches, gum) are inelastic — who notices a dime?
5. Narrow vs broad. ‘Food’ is broad — no substitutes (you have to eat), so inelastic. ‘Honeycrisp apples’ is narrow — switch to Galas, so elastic. Narrow categories have more substitutes, period.
Check yourself · no marks
Is demand for ‘soft drinks’ more or less elastic than demand for ‘Coca-Cola’?
Commit to one first. Guessing and being wrong beats reading the answer cold.
Tip
Walking through any good: the checklist
Hit each determinant in turn. Does it have substitutes? Necessity or luxury? What’s the time horizon? Budget share? How narrow is the category? When most factors point the same way, you have your answer. When they conflict, weigh the strongest.
Worked Example
You’re analyzing demand for Starbucks coffee. Walk through the determinants and classify whether demand is likely elastic or inelastic.
Practice · 1 / 5
Which good would you expect to have the MOST INELASTIC demand?
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