Availability of substitutes - determinants of demand, Managerial Economics

Q. Availability of Substitutes - Determinants of Demand?

One of the most important determinants of elasticity of demand for a commodity is availability of its substitutes. Closer the substitute, greater is elasticity of demand for the commodity. For example, tea and coffee could be regarded as close substitutes for one another. So if price of one of these goods increases, its demand decreases more than the proportionate rise in its price as consumers switch over to comparatively lower-priced substitute. Furthermore broader the choice of the substitutes, greater is the elasticity. For example washing powder, soaps, shampoos, toothpastes etc. are available in different brands; every brand is a close substitute for the other. So, the price-elasticity of demand for each brand would be to a large extent greater than general commodity. In contrast, salt and sugar don't have their close substitute and for this reason their price-elasticity is lower.

Posted Date: 8/10/2013 1:55:45 AM | Location : United States







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