Be the professor. (Or: You can lead a horse to water...)

Have you ever heard the phrase, "you can lead a horse to water but you can't make it drink?" There are probably two answers to this question:
1. The horse obviously isn't thirsty and its rude of you to try and make the poor thing drink
2. The water could be too expensive and the horse, being a horse, has no money

But, could something so essential as water, see a variation in demand with a change in price? For those of you who have any background in economics, you may already no the answer: not really, no.

Water is considered a staple good, something so essential to everyone's daily consumption that despite price we are willing to purchase it day in and day out. But then, there most be some goods that aren't bought when price is too high? If you were just thinking that, you'd also be correct.

Just to recall, look at the old graph for supply and demand.

Here's what we already know about supply and demand: 

- Demand starts high when price is low, where consumers want more goods for less (greedy much?)

- Supply starts low but rices with price, where sellers are willing to sell more for higher prices (...pot calls the kettle black, I guess) 

- Somewhere in the middle, there is a reasonable quantity of goods at a reasonable price that the highest amount of consumers will buy and the highest amount of sellers will sell. This is our equilibrium. 

And, for the most part, this holds true. 

Right? 

Right? 

Right...

Not so much actually. 

Now, before you get all up in arms and through your econ notes in the trash, let me clarify. THE LAWS OF SUPPLY AND DEMAND ARE TRUE FOR MOST GOODS MOST OF THE TIME. 

But what about some goods, some of the time. I mean won't people still want water at higher prices. 

That's true, we all need water and those that can will continue to buy it even if the price keeps increasing. Why, because water is INELASTIC. 

Elasticity- The tendency of goods to see a change in demand for a percentage increase in price. 

Inelasticity- The tendency of goods to experience little to no change in demand for any percentage increase in price. 

A demand chart for elasticity (or in this case inelasticity) of demand, looks like this: 

Notice that even as price rises, quantity demanded changes at a slower pace. So, even when the price jumped an entire dollar, overall demand only dropped by 2. 

A good deemed elastic has this kind of graph: 

See how even a slight price change causes a MAJOR shift in quantity demanded? 

So, we can now recognize elasticity by their graphs, and we can use inference to say that some goods like water will be inelastic, where something like a TV or iPod would be elastic. 

But what if we can't tell, or, what if elasticity could even vary from instance to instance? 

There's a pretty handy equation for that. 

Here is how this breaks down: 

Triangle(Delta) Q stands for the change in overall quantity (divided by) Q bar, which is the original quantity. 

OVER 

Triangle (Delta) P which is the change in price (divided by) P bar, our beginning price. 

What this means is we divide the rate of change of quantity by the original quantity and then divide that by the quotient of the rate of change in price divided by the original price. 

If the number you get, "E" is > 1, you have elastic demand. 

If E < 1, you have inelastic demand. 

If you feel confident, try applying it to a real world situation. Businesses often use this equation to try and predict what potential price changes could do to business. Next time you want to buy something, try applying this equation among a few alternatives, and see if one is giving you the best deal!