Question
Determinants of the price elasticity of demand Consider some determinants of the price elasticity of demand: Availability of close substitutesWhether the good is a necessity
Determinants of the price elasticity of demand
Consider some determinants of the price elasticity of demand:
Availability of close substitutesWhether the good is a necessity or a luxuryWhether the good is broadly definedThe proportion of a consumer's budget spent on the goodTime people have to adapt to new price changes
A good without any close substitutes is likely to have relativelyinelastic demand, because consumers cannot easily switch to a substitute good if the price of the good rises.
A good's price elasticity of demand depends in part on how necessary it is relative to other goods. If the following goods are priced approximately the same, which one has themostelastic demand?
A heart valve for heart attack victims
Diamond necklace
Price elasticity for a good depends on the share of a consumer's budget spent on a good. Other things being equal, which of the following goods has themostelastic demand?
Computer
Laundry detergent
Salt
The price elasticity of demand for a good also depends on how you define the good.
Organize the goods found in the following table by indicating which is likely to have the most elastic demand, which is likely to have the least elastic demand, and which will have demand that falls in between.
Categories
Most Elastic
In Between
Least Elastic
Red bell peppers
Vegetables
Food
The price elasticity of demand is also affected by the given time horizon.
Other things being equal, the demand for natural gas will tend to be elastic in the short run than in the long run.
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