Determinants of Price Elasticity of Demand

Question 1

explain this factor with examlpes: availability of substitutes

Answer 1

• more substitutes = more elastic
• less substitutes = more inelastic
• —> petrol = inelastic (less substitutes)
• —> cars = elastic (lots of substitutes)

Question 2

explain this factor with examples: type of good (luxury/necesity)

Answer 2

• necesiity type goods are more INELASTIC than luxury type goods
• –> heroin/cigarettes = inelastic (percieved necesity)
• –> champagne/jewelery = elastic (luxury)

Question 3

explain this factor with examlpes: definition of the market

Answer 3

• broadly defined market: a product are like ‘petrol’ (inelastic)
• narrowly defined market: a particular brand like BP or Caltex, there are many substitutes (elastic)
  (for all goods = price elasticity of demand>elasticity of good in general)

Question 4

explain this factor with examlpes: proportion of income spent

Answer 4

• expensive goods: relatively price elastic - take up larger proportion of consumer income/budget
• –> TV - if P rises by 25% ($2000 to $2500) greater affect on demand
• inexpensive goods: relatively price inelastic - affect a smaller proportion of consumer income/budget
• –> coffee - if price rises by 25% ($4 to $5) demand wont really be affected

Question 5

explain this factor with examlpes: time

Answer 5

• if consumers have time to respond to price changes = more elastic
• if price change is only for short run, no time to adjust = inelastic
• as time increases = more elastic (can find substitutes)
• –> example - petrol (price changes frequently)