Question

In class we indicated that there are several factors which affect the size of the price elasticity of demand. List 2 of these and indicate what would be true for that factor to lead to a higher value for the price elasticity of demand. a). b).

Answer 1

Factors which affect the size of the price elasticity of demand are-

1-Close Substitiues-A commodity with a number of close substitutes will have a high elsticity of demand.Because consumer can react to the change in price of such goods by shifting to other goods.

Example-Beverages

2-Nature of Goods-Elasticity also depends on the fact that whether the good is a neccessity or a luxury.Necessary goods have inelsatic demand i.e in such cases consumer do not decrease their consumption in case of increase in prices.However in case of luxury goods consumers react to the incease in price by deferring the consumption to future(reducing consumption in present.).

NOte-The fact that whether a good is a necessity or luxury depends on the income level of consumer.