As we previously noted, the availability of substitutes is the main reason why the demand curve for a good slopes downward. Some goods, however, are much easier than others to substitute away from. As the price of tacos rises, most consumers find hamburgers a reasonable substitute. Because of the ease of substitutability, the quantity of tacos demanded is quite sensitive to a change in their price. Economists would say that the demand for tacos is relatively elastic because a small price change will cause a rather large change in the amount purchased. Alternatively, goods like gasoline and electricity have fewer close substitutes. When their prices rise, it is harder for consumers to find substitutes for these products. When close substitutes are unavailable, even a large price change may not cause much of a change in the quantity demanded. In this case, an economist would say that the demand for such goods is relatively inelastic.
Graphically, this different degree of responsiveness is reflected in the steepness of the demand curve. The flatter demand curve is for a product like tacos, for which the quantity purchased is highly responsive to a change in price. As the price increases from $1.25 to $2.00, the quantity demanded falls sharply from 10 to 4 units. The steeper demand curve (D2, right frame) is for a product like gasoline, where the quantity purchased is much less responsive to a change in price. For gasoline, an increase in price from $1.25 to $2.00 results in only a small reduction in the quantity purchased (from 10 to 8 units). An economist would say that the flatter demand curve D, is “relatively elastic,” whereas the steeper demand curve D, is “relatively inelastic.” The availability of substitutes is the main determinant of a product’s elasticity or in- elasticity and thus how flat or steep its demand curve is.
What would a demand curve that was perfectly vertical represent? Economists refer to this as a “perfectly” inelastic demand curve. It would mean that the quantity demanded of the product never changes-regardless of its price. Although it is tempting to think that the demand curves are vertical for goods essential to human life (or goods that are addictive), this is inaccurate for two reasons. First, in varying degrees, there are substitutes for everything. As the price of a good rises, the incentive increases for suppliers to invent even more new substitutes. Thus, even for goods that currently have few substitutes, if the price were to rise high enough, alternatives would be invented and marketed, reducing the quantity demanded of the original good. Second, our limited incomes restrict our ability to afford goods when they become very expensive. As the price of a good rises to higher and higher levels, if we do not cut back on the quantity purchased, we will have less and less income to spend on other things. Eventually, this will cause us to cut back on our purchases of it. Because of these two reasons, the demand curve for every good will slope downward to the right.