We are increasingly aware of inflation.
Let’s see why.
The NY Times tells us that, last year, skyrocketing lumber prices bothered few of us and more expensive used cars mattered minimally. In 2021, we said the coronavirus was our top priority.
Below, the red line represents Republicans and people who lean Republican, the blue line is similarly grouped Democrats, and the middle line is for everyone:
Now, with the economy topping our list of concerns, the reason is inflation:
It is possible that inflation has grabbed our attention because people believe that the prices of bread, milk, gas, and ground beef are up substantially. And yes, all except bread have climbed a lot:
Our Bottom Line: Price Elasticity
Intuitively, we all know the law of demand. When prices go up, we are willing and able to buy less. With lower prices, we want more. Economists then take the next step. They ask if we have a big or little response to a price change. We call a large response elastic and a small one inelastic. Using a formula, we can compare proportional changes in quantity and price: % change in quantity/% change in price. A number larger than one reflects an elastic response; less than one says we are inelastic.
With inelastic demand, typically for necessities, the price change has a relatively small impact on how much we buy. When price goes up, we spend more because we have to. Whether it’s milk or gas or ground beef, the quantity we buy is somewhat constant. As a result, we wind up spending much more.
Because of inelasticity, we notice inflation.