determinant price elasicity of demand
A number of factors can thus affect the elasticity of demand for a good:[25]
Availability of substitute goods: the more and closer the substitutes available, the higher the elasticity is likely to be, [ as people can easily switch from one good to another if an even minor price change is made;[25][26][27] There is a strong substitution effect.[28] If no close substitutes are available the substitution of effect will be small and the demand inelastic.[28]
Breadth of definition of a good: the broader the definition of a good (or service), the lower the elasticity. For example,
Company X's fish and chips would tend to have a relatively high elasticity of demand if a significant number of substitutes are available, whereas food in general would have an extremely low elasticity of demand because no substitutes exist.[29]
Percentage of income: the higher the percentage of the consumer's income that the product's price represents, the higher the elasticity tends to be, as people will pay more attention when purchasing the good because of its cost;[25][26] The income effect is substantial.[30] When the goods represent only a negligible portion of the budget the income effect will be insignificant and demand inelastic,[30]
Necessity: the more necessary a good is, the lower the elasticity, as people will attempt to buy it no matter the price, such as the case of insulin for those that need it ]
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selymi|Points 8092|
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Asked 4/25/2012 3:47:50 AM
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