Question

Sort the following determinants of price elasticity of demand. Which ones make goods and services more elastic, and which ones make goods and services more inelastic?

A) When few substitutes exist for a good
B) The good is a necessity
C) The good is a large share of the consumer's budget.
D) A boardmarket category of goods
E) When looking at demand in the long run.

Answer 1

The price elasticity of demand can be influenced by factors such as substitutes, necessity, budget share, market category, and time frame.

Step-by-step explanation:

The price elasticity of demand measures the responsiveness of the quantity demanded to changes in price. Several factors can influence the price elasticity of demand:

1. When few substitutes exist for a good: A good with few substitutes tends to have a more inelastic demand because consumers have fewer alternatives to choose from.
2. The good is a necessity: Necessities tend to have more inelastic demand because consumers are less likely to reduce their consumption even if the price increases.
3. The good is a large share of the consumer's budget: If a good represents a significant portion of a consumer's budget, demand is likely to be more elastic because consumers are more sensitive to price changes when a larger portion of their income is at stake.
4. A broad market category of goods: Goods that are part of a broad market category tend to have more inelastic demand because consumers may perceive them as essential and have limited alternatives.
5. When looking at demand in the long run: In the long run, demand tends to be more elastic as consumers have more time to adjust their behavior and find substitutes if prices change.