Question

26. The fundamental determinant of the elasticity of demand is:

            a. how quickly per-unit costs increase with an increase in production.

            b. tastes and preferences.

            c. population.

            d. the number and closeness of substitutes.

Answer 1

Option d is correct

taste and preferences as well as population are determinant of demand for a product and not the elasticity of demand. Responsiveness of cost with increase in production is a supply side factor. however, the number and closing price of substitutes is a determinant of elasticity because if there are more substitute available it means consumer will be more responsive towards price change. This makes the demand for a product relatively elastic as consumer has a choice. when there are no close substitute consumer has to purchase the same product even when the price is increased dramatically. This makes the demand relatively inelastic.