On the Phenomenon of Inelastic Demand

Abstract

importance of collecting data for the purpose of enabling the manufac turer to ascertain how many additional customers he will acquire by a given reduction in the price of the article he makes cannot, be too strongly pressed upon the attention of those who employ themselves in statistical inquiries. In some ranks of society, any diminution of price in a commodity will bring forward but few additional customers; whilst, in other classes, a very small reduction will so enlarge the sale as to yield a considerable increase of profit.' These are the words of Charles Babbage, written in 1833, almost 120 years ago. Mr. Babbage displays a remarkable degree of understanding of what today is commonly referred to as demand elasticity (with respect to price). Although his description lacks some of the precision and refinements which today are associated with this concept-particularly in its relation to profit-his statement is a battle-cry for empirical inquiries into demand phenomena, and especially demand elasticity. It took, however, many years before this plea was heeded. In the absence of adequate statistical techniques, businessmen and economists could do little more than observe the relative responsiveness of purchases of a given good to changes in its price. On the basis of such observations, intermingled with some intuitive reasoning, certain commodities were declared elastic and others inelastic. These statements were merely qualitative in nature. Quantitative inquiries appeared much later. Since the early nineteen twenties the number of statistical demand analyses has been steadily increasing. The development of the least squares technique had made possible the quantification of demand functions and demand elasticity coefficients. Such quantitative information has since been obtained for various commodities in many European countries, India, Turkey, and particularly the United States. Although Mr. Babbage recognized the importance for firms to know the demand elasticity they face, i.e., firm demand elasticities, empirical research has been primarily concerned with commodity demand, or what is often called market or industry demand. Neglecting firm demand and emphasizing instead market demand became necessary in the absence of firm quantity and price data. We agree with Alfred Marshall who stated some sixty years ago: I believe that inductions with regard to the elasticity of demand and deductions based on