Economics of accounting services

External accounting services can be split into two distinct buckets as regards basic economics. The first bucket includes essential services that companies require every year regardless of financial performance. These services are "inelastic" services which are much less price sensitive than "elastic" services. Elastic services include special consulting services and other non-essential services companies outsource to professionals. The elastic services are highly sensitive to price, and companies forgo these services if necessary. The graphs below show the differences from a demand curve standpoint.

Elastic Demand Curve

This demand curve represents demand for consulting and other non essential accounting services provided by external accounting firms.

Perfectly Inelastic Demand Curve

This demand curve is perfectly inelastic, and represents demand for essential required accounting services including some assurance services and tax preparation services. Although these services may not be perfectly inelastic, they would be represented by a demand curve with a much higher negative slope then elastic services.

In summary, wile companies may require both types of accounting services their price based demand will vary for each. When companies are experiencing downturns, they become very sensitive to non-essential costs, and their internal demand curve for externally provided services will flatten and become increasingly flat. Accounting firms must be cognizant of this flattened curve, and be cautious of entering into longer term contracts while companies' demand curves for their services are flattening.