Free Demand and Prices Essay Sample
Necessity commodities refer to those goods that an individual cannot do without while substitute commodities are those goods, which may replace each other in consumption because of changes in conditions (Sherman & Hunt, 2008). An example of changes in conditions includes increase or decrease in the price of a good. In some countries, citizens consider coffee as a necessity commodity and tea as a substitute commodity. The necessity of a commodity and the availability of substitutes influence price elasticity.
Necessity commodities experience lower price elasticity of demand because buyers will make an effort to buy them no matter the price. Price elasticity refers to a degree of responsiveness of another variable to a change in the price of a commodity (Sherman & Hunt, 2008). Buyers become more responsive to price changes as the price elasticity increases. High price elasticity means that when a commodity becomes cheaper, clients will buy more of the commodity, and when the price of the commodity goes up, they will buy less of the commodity. On the other hand, low price elasticity means that changes in price affects demand less significantly.
In addition to changes in the price of a commodity, price elasticity also depends on the changes in the prices of substitute commodities. A change in the price of a substitute commodity will affect the demand of the original commodity in the same direction (Sherman & Hunt, 2008). For example, if the price of coffee goes up, coffee consumers will switch to tea. If the price of tea goes down, coffee becomes cheaper, and consumers buy more coffee instead, which lowers the demand of tea. Therefore, an increase in the price of a substitute commodity leads to an increase in the demand of the original commodity. On the other hand, a price decrease of a substitute commodity leads to a decrease in the demand of the original commodity.