Question

Good A has 10 substitutes, and good B has 20 substitutes. The demand is more likely to be elastic for which good? Explain your answer.

Short answer

The demand is more likely to be elastic for Good B because it has more substitutes (20) as compared to Good A (10). Greater the number of substitutes, higher is the elasticity of demand.

Step-by-step solution

Identify the number of substitutes

The question provides the number of substitutes for each good. Good A has 10 substitutes and Good B has 20 substitutes.

Understand the Effect of Substitutes on Elasticity of Demand

The elasticity of demand is directly related to the number of substitutes. This means that the higher the number of substitutes, the higher the elasticity of demand.

Determine Which Good Has More Elastic Demand

Since Good B has 20 substitutes, which is more than Good A's 10 substitutes, Good B's demand is more likely to be elastic because consumers have more alternatives or substitutes for Good B. Therefore, a change in the price of Good B is likely to cause a more significant change in the quantity demanded for Good B.

Key concepts

Understanding Substitutes

In everyday life, substitutes are products or services that can replace each other in usage. For instance, if you run out of pencils, you might use pens instead. This idea is pivotal when examining consumer behavior in economics. When a product has many substitutes, it means buyers have multiple alternatives they can turn to if the price of the original item increases.

Such substitutes make the choices available to consumers broader, giving them the flexibility to switch between products. More options generally influence the elasticity of demand, as we'll explore in the next section.

Consider this: if a certain good has ten possible alternatives, it offers a different kind of choice availability compared to another that has twenty substitutes. In a market scenario, the wider the availability of substitute goods, the more elastic the demand tends to be because consumers aren't locked into buying just one option.

The Role of Demand Elasticity

Demand elasticity measures how sensitive the quantity demanded of a good is to a change in its price. This concept is essential for understanding how consumers react to price changes. Demand elasticity is affected by several factors, including the availability of substitutes.

When many substitutes are available, the demand for a product becomes more elastic. This means that a small price increase can lead to a significant decrease in the quantity demanded because consumers can easily switch to the substitute goods. Conversely, if there are few substitutes, demand tends to be inelastic, where changes in price have a lesser impact on quantity demanded.

• High Elasticity: Many substitutes available, easily switchable.
• Low Elasticity: Few substitutes available, not easily switchable.

Understanding this concept helps businesses strategize pricing and production decisions effectively to maximize revenue. For consumers, it underscores the importance of price sensitivity and alternatives in everyday purchasing decisions.

Making Consumer Choices

Consumer choices are the decisions that individuals make regarding which goods and services to purchase, based on factors like price, needs, preferences, and income. Substitutes and demand elasticity play a significant role in shaping these decisions.

When consumers are faced with a price increase in a particular good with many substitutes, they can opt for an alternative product that meets the same need at a lower cost or better value. This choice demonstrates rational consumer behavior aimed at maximizing satisfaction and value for money.

Conversely, if options are limited due to fewer substitutes, consumers may have to endure price increases or search for alternatives outside their typical preferences. The ability to make informed consumer choices not only impacts individual well-being but also influences market trends as it showcases consumer power and adaptability in response to market changes.