Question

List and explain the four determinants of the price elasticity of demand discussed in the chapter?

Short answer

The four factors that describe demand's price elasticity areaccessibility of close substitutes, necessities versus luxuries, the meaning of the market, and time horizon. Items with close substitutes have higher elasticities, luxury goods have higher elasticities than needs, goods in more tightly defined marketplaces have higher elasticities, and demand elasticity increases as the time horizon lengthens.

Step-by-step solution

The four factors that describe the price elasticity of demand are:

• Accessibility of close substitutes
• Necessities versus Luxuries
• Meaning of market
• Time horizon

Accessibility of close substitutes:

Products that have some alternatives available in the market are more elastic. Due to the availability of other options, it is easier for buyers to switch from one product to another.

For example, suppose the consumer always prefers company A's butter, but it is currently not available in the market. Then the consumer can take the butter of company B, and if the person likes that product, then the person can switch to that brand of company B.

Necessities versus Luxuries:

Necessities refer to the products required daily and have inelastic demands, whereas luxuries are those items that have elastic demands.

For example, suppose an individual goes to the doctor every week, and the doctor increases their consultation fee. However, despite the increase in the consultation fee, the patient still visits the doctor, which is a necessity. Therefore it has inelastic demand.

Meaning of Market:

Narrowly defined markets have more elastic demand than broadly defined markets because narrowly specified items have near replacements.

For example, ice cream is counted in the narrower category and has elastic demand. However, food is considered to be in a wide variety and has inelastic demand.

Time Horizon:

The products can be used for a long time, so the product's demand will be elastic. For example,when the price of gasoline rises, the amount demanded lowers at first. People, on the other hand, gradually shift to more fuel-efficient vehicles or public transit. The amount of gasoline demanded will be significantly reduced.