Some Economic Principles of Battling Summertime Heat

Jul 30, 2015

High temperatures have fully arrived across the country and as they rise to the 90s and above, we are once again battling the often unbearable heat and humidity that comes with the season. Thankfully, for many, the presence of air conditioning is a much welcomed refuge as nothing beats the feeling of entering a comfortably air conditioned car or home after being out in the sun. But what happens if the air conditioner breaks? Do you replace it, fix it, or try to endure the grueling heat? For most of us, the answer depends (at least partly) on how we respond to air conditioning prices – an economic concept known as the price elasticity of demand.

Price elasticity gauges the reaction of consumers to price increases or decreases. If demand (the quantity purchased by consumers) is relatively responsive to a price change, then demand is considered elastic. If demand is not very responsive to a price change, then demand is considered inelastic. This determination is based on numerous influences, two of which are the “type of good” and the degree to which substitute goods exist.

Type of Good. If the good is a “necessary” good (like food and water) demand is inelastic, meaning your quantity demanded changes little when prices change. If the good is a “luxury” good (highly desirable, but not necessary) it may be very elastic, meaning if the price increases, the quantity demanded declines.

Substitutes. Substitute goods are goods that satisfy a similar demand for the good at issue. The greater the number of substitutes, the more elastic is demand is likely to be (if the price for a good increases, consumers may see other goods as good alternatives, making quantity demanded for this good decline). For example, some consumers may consider Pepsi and Coke to be substitute goods, and if the price of Pepsi rises, those consumers would likely purchase Coke.

Many authorities consider the demand for air conditioning to be extremely elastic, noting that most consider it to be a luxury good. However, anecdotal evidence suggests that lots of consumers – particularly in certain geographic areas where summer heat tends to be unbearable – just cannot go without their ACs. These individuals may consider it more of a necessity and their demand may be more inelastic.

So, as you venture off to baseball games, road trips, and your favorite summer spots, keep in mind how valuable your air conditioning really is! A summer spent without air conditioning would certainly not be very “cool” at all.

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