Once again, price elasticity of demand measures how sensitive consumers are to changes in price.The ratio is calculated by dividing the percent change in quantity by the percent change in price over a specific narrow range.Usually absolute value of price elasticity of demand calculation is taken and compared to one.If price elasticity of demand is greater than one, consumers are sensitive to changes in price and demand is elastic.If price elasticity of demand is less than one, consumers are not sensitive to change in price and demand is inelastic.

Certain factors influence price elasticity of demand.In other words, consumer demand can become more price elastic.Following factors can influence price elasticity of demand:availability of acceptable substitutes, response time to changes in price, percentage of income or family budget, and how broad or narrow a good or service is defined, and whether a good is a necessity or luxury item.

The more substitute goods or service available to consumers, price elasticity of demand could become much more price elastic.At lunch time, demand for hot dogs should be fairly price elastic.If prices of hot dogs increase, consumers will substitute for hamburgers, sandwiches, salads, pizza, and a whole host of other delicious selections to choose.Therefore, greater numbers of acceptable substitutes tend to make consumers more sensitive to price changes.

If price of gasoline increased tomorrow by 30%, consumers will buy about the same amount of gasoline for their cars.In a short period of time, consumers may not be able to adjust their spending patterns.However, if gasoline prices stay high for long periods of time, people will drive less and opt for more public transportation, riding bicycles and motorcycles, walking, driving moreefficiently, and substituting for more fuel-efficient cars and electric vehicles.Passage of time makes consumer demand more price elastic because more options or substitutes become available.

Consumers tend to be more sensitive to price for large purchases or goods and services costing a greater percentage of the family budget.Shoppers will take much more time to do research and compare prices for big ticket items like cars, appliances, and laptops.However, many consumers may not do much when the price of pencils increases by 25%.Consumer demand is more price elastic when items cost a significant portion of disposable income.

If products are identified by specific brand, there are more substitutes available.Demand for Conoco gasoline will be much more price elastic because of other brands of gasoline.Consumers could buy gasoline from ExxonMobil, BP, Chevron, and from many other brands.Specifically identifying products by vendor or brand allows for more substitutes, making consumer demand more price elastic.However, just using generic term gasoline makes consumer demand more price inelastic.There are fewer substitutes for gasoline in general.

Finally, necessities vs. luxury goods impact price elasticity of demand.Consumer addicted to smoking cigarettes or people needing insulin to treat diabetes will certainly be price inelastic when it comes to price changes.People who need insulin will pay the price to stay healthy.On the other hand, consumers tend to be more price sensitive for luxury goods and services.They aren't needed and increasing prices will discourage some consumers from purchasing.

As a final note, does price elasticity of demand influence what goods and services are taxed by local, state, and national government authorities?