1. Determinants of the price elasticity of demand Consider some determinants of
ID: 1103116 • Letter: 1
Question
1. Determinants of the price elasticity of demand Consider some determinants of the price elasticity of demand The availability of close substitutes Whether the good is a necessity or a luxury How broadly you define the market The time horizon being considered A good with many close substitutes is likely to have relatively substitutes if the price of the good rises. demand, since consumers can easily choose to purchase one of the close A good's price elasticity of demand depends in part on how necessary it is relative to other goods. If the following goods are priced approximately the same, which one has the least elastic demand? A heart valve for heart attack victims Yacht The price elasticity of demand for a good also depends on how you define the good. Organize the goods found in the following table by indicating which is likely to have the most elastic demand, which is likely to have the least elastic demand, and which will have demand that falls in between.Explanation / Answer
(a) A good with many substitutes is likely to have relatively More Elastic demand.
(b) Heart Valve has the least elastic demand (Since this is an absolute life saving medical necessity for the patient).
(c) Wine is a category of Beverages, and Merlot is a category of Wine. So, Beverage is most broadly defined and Merlot is least broadly defined. The broader the product definition, the less elastic demand is. Accordingly:
Merlot - Most elastic
Beverages - Least elastic
Wine - In between
(d) Demand for oil in long run will tend to be Less elastic (Longer time horizon makes demand less elastic).
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