The data shows that demand for a loaf of bread (PED = -0.2) is price inelastic, while demand for a car (PED = -2.5) is price elastic. There are several reasons for this difference.
First, bread is a necessity, whereas a car is often considered a luxury. Consumers need to buy bread regardless of small price changes, so demand is unresponsive. In contrast, the purchase of a car can be delayed if the price rises, making demand more responsive.
Second, a loaf of bread represents a very small proportion of a consumer's income. A 10% price increase is a small absolute amount, so consumers are unlikely to change their purchasing habits significantly. A car, however, is a major purchase and takes up a large proportion of income. A 10% price increase is a substantial sum of money, causing consumers to be much more sensitive to the price change.
Finally, while there are substitutes for a specific brand of bread, there are few substitutes for bread in general as a staple food. For cars, there are many substitutes, including different models and brands, second-hand cars, or alternative forms of transport like buses and trains. The availability of more substitutes makes the demand for cars more price elastic.
Price elasticity of demand (PED) measures the responsiveness of quantity demanded to a change in price. A value between 0 and -1 (like -0.2 for bread) indicates inelastic demand, meaning quantity demanded changes by a smaller percentage than price. A value less than -1 (like -2.5 for a car) indicates elastic demand, meaning quantity demanded changes by a larger percentage than price. The key reasons for this difference are:
1. **Necessity vs. Luxury:** Bread is a staple food, a necessity. People will continue to buy it even if the price rises. A car is a luxury for many; its purchase can be postponed.
2. **Proportion of Income:** Bread is a low-cost item that takes up a tiny fraction of a person's budget. A price change is barely noticeable. A car is a major expense, so consumers are very sensitive to price changes.
3. **Substitutes:** While one brand of bread has substitutes, bread itself has few. A car has many substitutes: other car brands, used cars, public transport, cycling, etc. More substitutes lead to more elastic demand.
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