As we have noticed, there is only a little that can be said about the demand for goods in general. Different goods will have quite different demand relationships. In particular, the elasticity of demand will be different for different goods and services. What determines the demand for a particular good or service?
The most important thing in determining whether the demand will be elastic or inelastic is the availability of substitutes. For example, we have reason to believe that the demand for public transportation is less elastic in New York City than it is in some other cities. The reason could be that there are fewer good substitutes for public transportation in New York City than in some smaller cities. The private car is the most important substitute for public transportation for most local traffic, and it is more expensive to keep a car in New York than it is most other places. Insurance is more costly and parking places are harder to get. For these and other reasons, there are a larger proportion of the population in New York than in most cities who do not have cars. In all cities, in increase in the price of a ride on public transportation will cause some riders to switch to cars. In New York the proportion who make this substitution -- car instead of subway -- is smaller than in most American cities, for the reasons we have seen. Thus, a 1% increase in the fare in New York causes a smaller (percent) cut in the number of riders; in other words, elasticity is smaller.
In general, the more substitutes there are for the good, and the better substitutes, the more elastic demand will be. The more substitutes, the more people switch, and so, the more elastic demand is.
Another important thing that affects the elasticity of demand is the proportion of income spent on the good. An increase in the price of a good or service reduces the purchasing power of income, and with less income (in purchasing power terms) people will cut back on purchases of all goods. If people spend a large part of their income on a particular good or service, then an increase in the price of that good or service reduces the purchasing power be a relatively great deal, causing a greater cutback than might otherwise occur. This means a bigger cutback when the price goes up -- more elastic demand.
It will also make a difference how much time people have to adjust to the change in price, but this can work out in several different ways. For cigarettes, for example -- a good for which habit formation is important -- the elasticity will probably be greater in the long run, since it will take a long time for people to break their habits and not be replaced by new smokers. For cars it would work the other way. In a short period of time, if car prices go up, people can just keep driving their old clunkers. That is, the cars already on the road are substitutes for new cars. But in a longer period of time the old cars wear out and the elasticity of demand is less.
Even after all these things are considered, there is still a lot of variation in the elasticity of demand from good or service to good or service. The only way to answer the question is to look at the numbers, do the statistics, and let the evidence tell us what the elasticity of demand is for a particular good.
