Chapter 16: Problem 600

What are some of the determinants of elasticity of demand?

Short Answer

Expert verified

Some determinants of elasticity of demand include the nature of the good (necessity vs. luxury), availability of substitutes, time period (short run vs. long run), proportion of income spent on the good, degree of brand loyalty, and addictiveness of the good. These factors affect how sensitive the quantity demanded is to changes in price.

Step by step solution

1. The Nature of the Good

One of the main determinants of elasticity of demand is the nature of the good. Generally, necessity goods have inelastic demand, which means that a change in price does not significantly affect the quantity demanded. In contrast, luxury goods are more likely to have elastic demand, meaning that a change in price significantly affects the quantity demanded. This is because consumers can more easily cut back on luxury goods when prices rise, while this is not the case for necessity goods.

2. Availability of Substitutes

The availability of substitutes is another determinant of elasticity of demand. If there are many close substitutes for a good, consumers can easily switch to an alternative product if the price of the original good increases. In this case, the demand is elastic. However, if there are few or no close substitutes, consumers are less likely to switch to an alternative product, making the demand inelastic.

3. Time Period

The time period also plays a role in determining the elasticity of demand. In the short run, demand is often inelastic as consumers have limited ability to adjust their consumption in response to price changes. However, in the long run, consumers may be able to adjust their behavior and find alternatives, making the demand more elastic.

4. Proportion of Income Spent on the Good

Another determinant of elasticity of demand is the proportion of income that consumers spend on the good. If a good represents a relatively large portion of a consumer's income, they are more likely to be sensitive to changes in price, making the demand more elastic. In contrast, if a good represents a smaller portion of a consumer's income, they may not be as sensitive to price changes, making the demand more inelastic.

5. Degree of Brand Loyalty

The degree of brand loyalty can also affect the elasticity of demand. If consumers are loyal to a particular brand, they may be less likely to switch to an alternative product due to a change in price, resulting in inelastic demand. On the other hand, if consumers are not loyal to a specific brand, they are more likely to respond to price changes by switching to alternative products, leading to elastic demand.

6. Addictiveness of the Good

In some cases, the demand for goods that are considered addictive (such as cigarettes or alcohol) may be inelastic. This is because people who are addicted to these products may be less sensitive to price changes, as they will continue to purchase the good despite increases in price. However, the degree of addictiveness may vary among individuals, and price changes could still affect the demand for the good to some extent.

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