This is probably the most important factor
influencing the elasticity of a good or service. 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. This means that coffee is an elastic good because a raise in price will cause
a large decrease in demand as consumers start buying more tea instead of coffee.
However, if the price of caffeine were to go up as a whole, we would probably
see little change in the consumption of coffee or tea because there are few
substitutes for caffeine.
Most people are not willing to give up their morning cup of caffeine no matter what the price. We would, therefore, say that caffeine is an
inelastic product because of its lack of substitutes. Thus, while a product within
an industry is elastic due to the availability of substitutes, the industry itself tends
to be inelastic.
Usually, unique goods such as diamonds are inelastic because
they have few - if any - substitutes.
