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B. Venkatesh

PETROL prices have risen sharply since January. But has that prevented you from taking your vehicle to the office or to the movie with your family? If not, you could call petrol as relatively price inelastic. What is price elasticity?

When a change in price causes a sharp change in demand, the product is said to be price elastic. A product will be price elastic if you can easily find a substitute for it.

Suppose you are a coffee drinker. What if coffee price rises by Rs 50 per kg? You might switch to tea or some other beverage.

The same cannot be said of petrol, as there are no substitutes for that product. You can at best stop using your vehicle for weekend travel. It is essentially a question of the convenience of travel versus the increase in petrol price.

Notice that we call petrol as relatively price inelastic. This is because it is hard to find a product that is perfectly inelastic. That is, there is no commodity that will not force us to cut consumption or hunt for substitutes when its price increases.

What if petrol prices were to increase to, say, Rs 75 per litre? You may, perhaps, decide to give up private transport and use the public mode for commuting.

Typically then, demand for elastic goods decline when price increases. But not all goods enjoy such a demand-price relationship.

Suppose real estate is available in a posh neighbourhood, the demand for the property may not necessarily fall if the price increased. On the contrary, the demand may go up. The reason? It is a status symbol to live in a posh neighbourhood. So, the rise in prices might actually increase demand. Thorstein Veblen, an American economist and sociologist, termed this as "conspicuous consumption".

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