Factors Effecting the Elasticity of Demand - 20

''Necessities'' tend to have inelastic demand curves. If households see a good as essential to daily living, demand for the good will be ''price insensitive''. For example, if the price of milk rose by 50 cents a litre, demand for milk would not change greatly. All households want milk.

Luxuries on the other hand tend to have elastic demand curves. If soft drinks are put on ''special'' at your local supermarket, and their price is lowered, demand for them will rise markedly. Part of this ''necessities'' versus ''luxuries'' distinction is based on the cost of the item. Many necessities are inexpensive: they have low prices - a loaf of bread, a litre of milk, a box of matches, all only cost a very small part of your available disposable income. An increase in the price of a litre of milk of 50 cents is still ''small change'' for many consumers, and they will continue to demand milk at the same levels as they did before the price rise. Luxuries on the other hand can be very expensive and cost a large part of your available disposable income. You may decide not to buy that French champagne to celebrate a birthday, if the price rises from $30 to $32. The price of $30 is already a large enough disincentive.

Some goods are habit forming, or addictive. Cigarettes are a clear example. Once ''hooked'', the average smoker will continue to pay more and more for cigarettes, as governments increase taxes on tobacco. Very few smokers give up smoking because of price increases; most give up for health reasons.