Why Do Prices Of Some Goods Fluctuate More Than Others
Q. Why do prices of some goods fluctuate more than others?
A. It is a well known fact, that various prices of goods fluctuate at various levels. The products which fluctuate most in price are often held to be necessities, but what is that makes these changes, and which factors influence them.
Before trying to conclude which goods fluctuate most price- wise and why, it seems sensible to ask which group these products belong. As mentioned necessities are known to be inelastic, but so are a lot of products with no close substitutes like for example motor cars, petrol, tobacco and alcoholic drinks. Now what do these goods have in common, one might ask. Well, for starters they all have a very inelastic demand. In these situations we get the graph as the one below (1.A). From 1.A it is obvious that if quantity by some reason decreases from Q1 to Q2 this gives a quite high increase in price from P1 to P2. From this it can be concluded that a small change in quantity of a product which has low elasticity, results in high changes in price, i.e. a lot of price fluctuations.
On the other hand we have products who's prices rarely fluctuate as for example luxuries. Here again it is obvious that a change in quantity demanded will result in only a little change in price. This is displayed in the graph 1.B below. Here we can see that quantity changes from Q1 to Q2 resulting on the change P1 to P2, which here concludes that the products like luxuries have highly elastic demand, resulting in only small price fluctuations.
From the above I can conclude that the reason why some goods fluctuate more price wise than others is due to the elasticity of the examined good.
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