Question

How will the elasticity of demand be affected in the following cases?

A. More substitutes become available.
B. The income elasticity decreases.
C. The budget share increases for normal goods.
D. The budget share increases for inferior goods.

Answer 1

A) When more substitutes are available for a good , people will not purchase the good even if the price increases slightly . So the good becomes more elastic in nature .

B) Decrease in income elasticity means that even when income changes , the quantity demanded does not change much . Income change can also occur due to price change of the good . When price decreases we feel richer since we can afford more units of the good . But here since income elasticity decreases , price elasticity of demand will also decrease .

C) If the budget share increases for normal goods , elasticity of demand for normal goods will fall . People can spend more on normal goods even if price rises since more budget is allocated .

D) Budget share increases for inferior goods , So normal goods become more elastic in nature .