Answer to Question #79069 in Economics of Enterprise for Shafee Kock

Question

Identify five determinants of price elasticity of demand with each determinant explain how it increases or decreases elasticity

Answer 1

The factors of price elasticity include:
1. The presence of substitute products: the more they are, the more elastic demand.
2. The share of expenses for this product in the consumer budget: the more it is, the higher the elasticity. However, this argument is not absolutely correct. Of course, if the goods represent a significant share in the total cost of the consumer, a small change in its price will cause a relatively large change in the real income of this consumer. But this only applies to absolute volumes.
3. Degree of necessity of this product: the elasticity of demand is lower than all those goods which from the point of view of this consumer are useful for him. Therefore, here for each there are their criteria: one when increasing prices for cigarettes refuse to smoke, others - no.
4. Variety of possibilities of using this product: the more directions of its use, the more elastic demand (demand for universal machines is more elastic than specialized ones).
5. Adjustment time to change prices. Typically, demand is more elastic in the long run, since during this time can be found or even mastered the production of substitute products, and opportunities for painless reduction of consumption of this product.