What are the key determinants of the price elasticity of demand for a product? Which determinant is the most important?

Generally, there are five key determinants of price elasticity of demand: (1) the availability of substitute goods, (2) the proportion of income spent on the good, (3) the necessity of the good, (4) the time horizon, and (5) consumer's sensitivity to price changes (i.e., whether the good is a luxury or a necessity).

(1) The availability of substitutes: If there are many substitutes available for a particular product, consumers will have more options to switch to when the price of the product increases; hence, the price elasticity of demand will be high. (2) The proportion of income spent on the good: If the good represents a large portion of the consumer's income, then the consumer will be more responsive to changes in price, and thus, the price elasticity of demand will be high. (3) The necessity of the good: If the good is necessary to consumers, they will continue to buy it regardless of price changes, so the price elasticity of demand will be low. (4) The time horizon: Over more extended periods, consumers can adjust their behavior more to price changes, so the price elasticity of demand rises over time. (5) Whether the good is regarded as a luxury or a necessity: If the good is deemed a luxury, consumers may be more inclined to cut back, and the price elasticity of demand will be high.

While all determinants are important, the availability of substitutes is often cited as the most significant determinant of price elasticity of demand. This is because, in most scenarios, when the price of a good with readily available substitutes increases, consumers can easily switch to other similar goods, displaying a high sensitivity to price changes.