Question

microeconomics question. So I understand that with more substitutes the good becomes more elastic, people can get the good somewhere else cheaper, and it is not a necessity.

However when the price of a good skyrockets and the demand drops way down, wouldn't that make it more elastic or inelastic and why? im so confused

Answer 1

When a particular good becomes more or less elastic due to a change in the factor other than its own price, there is a change in the slope which changes the curvature of the demand function. for example if the demand is now getting more elastic because of more substitutes available the slope of the demand function will be reduced and the demand curve will be flatter. This has nothing to do with the movement up or down along the demand curve which considers the slope unchanged.

however when there is a change in the own price of the good keeping all the other factors constant, there is no change in the slope of the demand function but along the original demand curve there can be different elasticities. For example, suppose there is an increase in the price of the good, then we move up along the original demand curve keeping the slope of the demand curve unchanged. However, we know that the upper portion of the demand curve is relatively elastic to the lower portion. This implies, as we move up along the demand curve the demand becomes more price elastic.