Product Price Elasticity

Price Elasticity and De Beers Diamond Engagement Rings

According to the online guide to economics, Investopedia, price elasticity is generally determined by the need of the consumer for a particular good or service. “Elasticity varies” among products because some products “may be perceived more essential” to the consumer. Products that are necessities tend to be more insensitive to price changes because consumers feel that they must “continue buying these products despite price increases.” (Investopedia, 2005)

What is defined as a necessity, of course, may vary from consumer to consumer. Clearly, food, shelter, and protection from the elements are all necessities. Not everyone needs caviar when money is tight, sometimes canned tuna fish will do — but nor do many people exclaim, diamond prices are going down, lets get engaged — twice! Thus, how does one assess the price elasticity of a diamond engagement ring, as produced by a De Beers luxury diamond retailer, as opposed to a discount engagement diamond retailer? (De Beers Official Website, 2004) For most of the 20th century, the De Beers family ran the diamond industry as a cartel in South Africa. “De Beers once controlled some 80% of the world supply of rough stones. As recently as 1998 it accounted for nearly two-thirds of supply. But today production from its own mines gives it a mere 45% share,” and discount diamonds have grown more plentiful and profitable. But even though discount diamonds abound, particularly in engagement rings — for some consumers, the only diamond they will ever buy — De Beers diamonds boast greater clarity, cut, color, and complexity. (Johannesburg & Windhoeck, 2004)

Usually, the price increase of a good or service that is considered less of a necessity will deter more consumers because of the high opportunity cost of buying the product. For example, consumers will buy a soft cover book rather than a hard cover book, unless there are unusually enamored of the author — but unlike a book, a diamond engagement ring has a less extensive array of substitutes.

Also, “a good or service is considered to be highly elastic if a slight change in price leads to a sharp change in the quantity demanded or supplied. Usually these kinds of products are readily available in the market and a person may not necessarily need them in his or her daily life.” Although not a necessity, diamonds of great quality are not readily available to consumers. (Investopedia, 2005) On the other hand, an inelastic good or service is one whose changes in price witness only modest changes in the quantity demanded or supplied, if any at all. These goods tend to be things that are more of a necessity to the consumer in his or her daily life. Products that witness no change in demand despite a change in income usually have an income elasticity of zero because these goods and services are considered necessities. A person, it might be expected, choosing between a diamond engagement ring for his fiancee and food to put on his table might chose the food, and when economic circumstances improve, then seek to buy the diamond, to perhaps replace an inferior model given as an engagement placeholder.

However, other factors affect price elasticity. There are three main factors that influence a demands price elasticity: In general, the more substitutes, the more elastic the demand will be. For example, if the price of a cup of coffee went up by $0.25, consumers could replace their morning caffeine with a cup of tea. But although it may not be a necessity for most people, “usually, unique goods such as diamonds” when given.

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