Mind map
Demand Elasticity: The determinants broken down
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Demand Elasticity: The determinants broken down
Availability of Close Substitutes
- The availability of subsitutes is the most important determinant
- If a product has more substitutes available , it will have more demand
- If a product has fewer substitutes available, it will have a less elactic demand
- The availability of subsitutes is the most important determinant
Passage of Time
- It takes consumers time to adjust to their buying habits when price changes.
- In other words the more time that passes, the more elastic the demand for a product becomes
Luxuries vs Necessities
- The demand curve for a luxury is more elastic than the demand for necessities
- For EX: Demand for milk is a necessity which makes it inelastic
- The demand for concert tickets is a luxury which puts that as an elastic
- For EX: Demand for milk is a necessity which makes it inelastic
- The demand curve for a luxury is more elastic than the demand for necessities
Definition of Market
- In a narrowly defined market, consumers have more substitutes available
- For EX: if you own a service station and rise the price of gasoline consumers are likely to go to a competitor
- so the demand for gasoline at one particular station is likely to be more elastic
- For EX: if you own a service station and rise the price of gasoline consumers are likely to go to a competitor
- In other words the more narrowly we define a market, the more elastic demand will be
- In a narrowly defined market, consumers have more substitutes available
Share of Good in a Consumer's Budget
- A good that take only a small fraction of a consumer's budget tend to have less elastic demand than goods that take a large fraction
- For EX: an increase in salt that consumers buy infrequently and in small quantities will result in a small deline of salt demanded
- If there was an increase of price of "big-ticket-items" (Houses, Cars, Furnature) it would result in a significant decline of demand
- For EX: an increase in salt that consumers buy infrequently and in small quantities will result in a small deline of salt demanded
- A good that take only a small fraction of a consumer's budget tend to have less elastic demand than goods that take a large fraction
Elastic and Inelastic Demand
- Elastic
- Where the percentage change in quantity demanded is greater than the percentage change in price
- So the price elasticity is greater than 1 absolut value
- Where the percentage change in quantity demanded is greater than the percentage change in price
- Inelastic
- Where the percentage change in quantity demanded is less than the percentage change in price,
- so the price elasticity is less than 1
- Where the percentage change in quantity demanded is less than the percentage change in price,
- Unit Elastic
- Where the percentage change in quantity demanded is equal to the percentage change in price
- So the price elasticity is equal to 1 in absolute value
- Where the percentage change in quantity demanded is equal to the percentage change in price
- Elastic