Question

Would you expect supply to play a more significant role in determining the price of a basic necessity like food or a luxury like perfume? Explain. Hint: Think about how the price elasticity of demand will differ between necessities and luxuries.

Short answer

Supply is more important in deciding the price of a fundamental necessity than it is in determining the price of a luxury item.

Step-by-step solution

Definition

Price Elasticity of Demand :

The Price Elasticity of Demand (PED) of a product helps us understand how responsive the quantity required of the product is to price fluctuations. The PED's absolute value indicates how responsive demand is to price changes.

Explanation

Supply is more important in deciding the price of a fundamental necessity than it is in determining the price of a luxury item. The price is decided by the supply because the demand for a requirement is typically inelastic and does not respond significantly to price fluctuations. A luxury good's demand, on the other hand, is elastic, and any changes in supply result in quantity adjustments rather than price changes.