1a. (PED) Determinants [SHIT]

1a. (PED) Determinants [SHIT]

1. 1. Substitutes (Degree of Availability)

   • Greater availability of substitutes, the more price elastic the demand would be. Degree of availability of substitutes depend on:
     • Number & Closeness of Substitutes
       • Greater no. of substitutes available, higher price elasticity of demand. -- Consumers have more options thus can easily switch to substitutes when price rise.
         • Closer substitutes available, higher price elasticity of demand. -- Consumers can easily switch to buying substitutes which can easily satisfy same purpose/want.
           • Close substitues - Price Elastic Demand. No close Sub - Price inelastic Demand.
     • Definition of good
       • No. & closeness of substitute depend on how good defined. The more widely defined the good, the lesser number of substitutes, lower value of PED, more price inelastic the demand.
         • (EG) Veg more widely denied than broccoli. No alternative to veg if we wish to eat. However can choose kaolin, spinach, cauliflower instead of broccoli. Thus, PED for veg lower than PED for broccoli.

2. 2. Habit

   • Some goods, such as cigarettes and alcohol, are habit forming. In such cases, demand will tend to be price inelastic.
   • Similarly, rice is staple in many Asian societies and consumed on a habitual basis. Thus, demand for rice is likely to be more price inelastic in Sg compared to a European country.

3. 3. Proportion of Income spent on good

   • Higher proportion of our income spent on good, the more we will be forced to cut consumption of the good when its price rises and thus more price elastic of demand.
     • Bc smaller % increase in its price will take up larger proportion of consumer's available income and hence have substantial impact on qty that consumers able to buy.
       • (EG) Family spends large proportion of its income on a house. A small % increase in price of housing would take up larger % of their available income and hence have substantial impact on qty that consumers able to purchase. This forces consumers to reduce consumption more than proportionately when housing price rises.
   • Lower proportion of consumers' income spent on good, more price inelastic its demand.
     • Bc consumers spent such tiny fraction of their income on good, they will find little difficulty in paying a relatively large % increase in price.
       • (EG) Tissue paper has very low price elasticity of demand bc even large % increase in price would constitute only a small proportion of consumers' income.

4. 4. Time Period

   • The longer the period of adjustment, the more responsive the change in qty demanded is to a given change in price, the more price elastic the demand of good.
     • Bc consumers require time to respond to price change and adjust their consumption patterns and look for alternatives. Hence, longer time period, more likely consumers would adjust their consumption patter & switch to other substitutes.
       • + Time is needed for dev/discovery of substitutes. Thus in long run, new substitutes can be dev/created causing demand to become relatively more price elastic.

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