Determinants of the price elasticity of demand, Microeconomics

Determinants of the price elasticity of demand are explained below:

1. Number of close substitutes present within the market - The more and closer substitutes available in the market more elastic the demand will be in response to the change in price. In this case, the substitution effect will be pretty strong.

 

2. Percentage of income spent on a good - It may be the case with the smaller the proportion of the income spent taken up with purchasing the commodity or service the more inelastic demand will become.

 

3. Time period under consideration - Demand tends to become more elastic in the long run rather than in the short run. For instance, after the two world oil price shocks of the 1970s - "response" to increased oil prices was modest in the immediate time period after price increases, but as the time passed, people created new ways to consume less petroleum and other oil products. This included measures to get the improved mileage from their cars; higher spending on the insulation in homes and car pooling for commuters. The demand for the oil became much more elastic in the long- run.

Posted Date: 7/19/2012 4:06:26 AM | Location : United States







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