REACTION PAPER By Elizabeth Orendain-Dela Cruz The Elasticity of Wants Alfred Marshalls Principles of Economics (1890) Elasticity is a way

to measure how the change in one thing (price) causes change in another (demand). Understanding elasticity of demand is valuable in knowing the dynamic response of supply and demand in a market. Such understanding will enable an enterprising person (businessman and/or consumer) to achieve a favorable effect (higher revenue/best value of ones money) or avoid unintended outcome. For instance, a company (manufacturing commodities like shampoo or toothpaste) considering a price increase might find that by doing so, it lowers profits if demand is highly elastic, as sales would fall sharply. Similarly, a company considering a price cut might find that it does not increase sales, if demand for the product is price inelastic. It is therefore imperative to correctly analyze data on the elasticity of the companys products in the market before deciding whether to increase or decrease its price viz-a-vis its total revenue and quantity of demand of such products. Alfred Marshall in his 1890 book Principles of Economics, particularly in his discussion on elasticity of wants tried to explain and illustrate the relationship of price and demand and its overarching influence of one over the other and vice versa. His analysis underscored the relationship of price and demand; he demonstrated how an increase or decrease in price affects the decrease and decrease of demand of a particular good. Although on a personal level I found the products/goods he used in his illustrations quite obsolete to modern students of economics (the fault of which is not entire his as those were the available and commonly used commodities in his time), the discussion is very instructive and comprehensive. Marshall described Elasticity of Demand as thus: And we may say generally:- the elasticity (responsiveness of demand in a market is great or small according as the amount demanded increases much or little for a given fall of price, and diminishes much or little for a given rise in price. He reasons this since the universal law as to a person's desire for a commodity is that it diminishes but this diminution may be slow or rapid. If it is slow a small fall in price will cause a comparatively large increase in his purchases. But if it is rapid, a small fall in price will cause only a very small increase in his purchases. In the former case the elasticity of his wants, we may say, is great. In the latter case the elasticity of his demand is small. He continued by discussing that there are multiple factors or determinants which affect the elasticity of demand of a particular good. One is consumers level of income. He pointed out that we will be able to get the clearest notion of the law of the elasticity of demand by considering one class of society at a time The willingness of a consumer to pay for a good is determined in part by the level of his income. The higher the products price the lesser the demand of that particular good. People will pay more attention when purchasing the good because of its cost. Hence, the demand is elastic. However, when the goods represent only a negligible portion of the budget, the income effect will be insignificant and demand inelastic.

Marshall explained that when the price of a thing is very high relatively to any class, they will buy but little of it, but as soon as it has been taken into common use, any considerable fall in its price causes a great increase in the demand for it. The elasticity of demand is great for high prices, and great, or at least considerable, for medium prices; but it declines as the price falls; and gradually fades away if the fall goes so far that satiety level is reached. Another factor that affects the elasticity of demand is the necessity of goods. The more necessary the good is the lower the elasticity, as people will attempt to buy it no matter the price. Generally speaking, demand is very inelastic, for absolute necessaries (as distinguished from conventional necessaries and necessaries for efficiency). One contemporary example of this is the necessity of gasoline/fuel. No matter how much the increase of its price, though with much grumblings, people still tend to purchase it because it is absolutely necessary for vehicles to run. Another determinant is the availability of substitute goods. The more and closer the substitutes available, the higher the elasticity is likely to be, as people can easily switch from one good to one another if an even minor price change is made. There is a strong substitution effect. If no close substitutes are available the substitution of effect will be small and the effect inelastic. Thus, And lastly, the allowance of time/duration of rise in price. For most goods, the longer a price holds, the higher the elasticity is like to be, as more and more consumers find they have the time and inclination to search for substitutes. He pointed out that time is required to enable a rise in the price of a commodity to exert its full influence on consumption. Time is required for consumers to become familiar with substitutes that can be used instead of it, and perhaps for producers to get into the habit of producing them in sufficient quantities. Time may be also wanted for the growth of habits of familiarity with the new commodities and the discovery of methods of economizing them. As a summary, generally speaking, the demand for a good is said to be elastic (or relatively elastic) if changes in price have a relatively large effect on the quantity of a good demanded. This indicates that elastic products are more sensitive (responsive) to changes in price. On the other hand, demand for a good is said to be inelastic (or relatively inelastic) if changes in price have a relatively small effect on the quantity of the good demanded, i.e., as price increases on an inelastic curve, theres very little impact to the quantity demanded its almost indifferent.