(a) List and briefly explain, in your own words, the determinants of the price e
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Question
(a) List and briefly explain, in your own words, the determinants of the price elasticity of demand.
(b) Choose one of the goods from exhibit 6 on page 163 in your text. Explain whether or not each of the determinants of elasticity would make demand for that good more elastic.
section 5.1 Price Elasticities of Demand for Selected Goods exhibit6 Good Salt Air travel Gasoline Medical care and hospitalization Jewelry and watches Physician services Alcohol Movies China, glassware Automobiles Chevrolets Short Run Long Run 0.1 2.4 0.7 0.9 0.7 0.1 0.2 0.3 0.4 0.6 0.9 0.9 1.5 1.9 3.6 3.7 2.6 2.2 4.0Explanation / Answer
a) The determinants of price elasticity of demand-
1) The availability of substitutes- If people can get the same level of utility with fewer price people would like to substitute if the price is increased. That is the elasticity of demand increases if number of substitute increases
2) The proportion of consumers income spent- The more the proportion of income spent on a commodity, the greater will be the elasticity of demand and vice versa. The demand for necessary goods is highly inelastic as the household spent only a fraction of their income on this type of goods. When the price of necessary goods increase, it will not make much difference in consumer's budget and so they will continue to buy almost the same quantity of that goods. On the other hand demand for luxury goods is highly elastic. Because people spent a large portion of their income on this type of good. If price increases, people have to increase their budget. So the demand decreases significantly.
3) Complementary between goods- Households are generally less sensitive to the price changes of goods that are complementary with each other compared to those goods which have an independent demand or used alone.
4) Time- In the short run people cannot substitute their consumption choice. But in the long run, people can substitute if the price changes. So in the short run price elasticity of demand is inelastic and in the long run price elasticity of demand is elastic.
b) Here I choose gasoline. The elasticity of demand is 0.2 in the short run and in the long run, is 0.7. In the short run, demand is inelastic because people can not find substitute product with short time if there is a price change. But in the long run people finds the substitute of gasoline, if price changes they have an option to switch their consumption, so demand is elastic. Here availability of substitute and time are the determinants those would make the demand more elastic.
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