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2.2 PRICE ELASTICITY OF DEMAND 49
TABLE 2.2 Estimates of the Price Elasticity of Demand for Selected Modes
of Transportation
Category Estimated Q,P

Airline travel, leisure 1.52
Rail travel, leisure 1.40
Airline travel, business 1.15
Rail travel, business 0.70
Urban transit between 0.04 and 0.34
Source: Elasticities from the cross-sectional studies summarized in Tables 2, 3, 4 in Tae Hoon Oum,
W. G. Waters II, and Jong-Say Yong, “Concepts of Price Elasticities of Transport Demand and
Recent Empirical Estimates,” Journal of Transport Economics and Policy (May 1992): 139–154.

Here are some factors that determine a product’s price elasticity of demand––that
is, the extent to which demand is relatively sensitive or insensitive to price.

• Demand tends to be more price elastic when there are good substitutes for a product (or,
alternatively, demand tends to be less price elastic when the product has few or
not very satisfactory substitutes). One reason that the demand for airline travel
by leisure travelers is price elastic (as Table 2.2 shows) is that leisure travelers
usually perceive themselves as having reasonably good alternatives to traveling
by air; for example, they can often travel by automobile instead. For business
travelers, automobile travel is usually a less desirable substitute because of the
time-sensitive nature of much business travel. This explains why, as Table 2.2
shows, the price elasticity of demand for business travel is smaller (in absolute
magnitude) than that for leisure travel.
• Demand tends to be more price elastic when a consumer’s expenditure on the product
is large (either in absolute terms or as a fraction of total expenditures). For example,
demand is more elastic for products such as refrigerators or automobiles. By
contrast, demand tends to be less price elastic when a consumer’s expenditure
on the product is small, as is the case for many of the individual grocery items
in Table 2.1. When a consumer must spend a lot of money to buy a product,
the gain from carefully evaluating the purchase and paying close attention to
price is greater than it is when the item does not entail a large outlay of money.
• Demand tends to be less price elastic when the product is seen by consumers as being a
necessity. For example, household demand for water and electricity tends to be
relatively insensitive to price because virtually no household can do without
these essential services.

MARKET-LEVEL VERSUS BRAND-LEVEL PRICE
ELASTICITIES OF DEMAND
A common mistake in the use of price elasticities of demand is to suppose that just
because the demand for a product is inelastic, the demand each seller of that product
faces is also inelastic. Consider, for example, cigarettes. As already discussed, the demand
for cigarettes is not especially sensitive to price: an increase in the price of all brands
of cigarettes would only modestly affect overall cigarette demand. However, if the
price of only a single brand of cigarettes (e.g., Salem) went up, the demand for that
brand would probably drop substantially because consumers would switch to the now