Question

4. Determinants of the price elasticity of demand

Consider some determinants of the price elasticity of demand:

•	The availability of close substitutes
•	The proportion of a consumer's budget spent on the good
•	The time horizon being considered

A good with many close substitutes is likely to have relatively   demand, because consumers can easily choose to purchase one of the close substitutes if the price of the good rises.

A good’s price elasticity of demand depends in part on how necessary it is relative to other goods. If the following goods are priced approximately the same, which one has the least elastic demand?

Yacht

Chemotherapy for cancer patients

Price elasticity for a good depends on the share of a consumer's budget spent on a good. Other things being equal, which of the following goods has the most elastic demand?

TV and Internet service plan

Lightbulbs

Toothbrush

The price elasticity of demand for a good also depends on how you define the good.

Organize the goods found in the following table by indicating which is likely to have the most elastic demand, which is likely to have the least elastic demand, and which will have demand that falls in between.

Categories	Most Elastic	In Between	Least Elastic
Vegetables
Red bell peppers
Food

The price elasticity of demand is also affected by the given time horizon.

Other things being equal, the demand for natural gas will tend to be   elastic in the short run than in the long run.

Answer 1

A good with many close substitutes is likely to have relatively elastic demand because consumers can easily choose to purchase one of the close substitutes if the price of the good rises.

A good’s price elasticity of demand depends in part on how necessary it is relative to other goods. If the following goods are priced approximately the same, which one has the least elastic demand?

Chemotherapy for cancer patients

As it is life-threatening so no matter the cost,the person will buy it

Price elasticity for a good depends on the share of a consumer's budget spent on a good. Other things being equal, which of the following goods has the most elastic demand?

TV and Internet service plan

As other goods are necessities whereas TV and internet are luxuries

The price elasticity of demand for a good also depends on how you define the good.

Organize the goods found in the following table by indicating which is likely to have the most elastic demand, which is likely to have the least elastic demand, and which will have demand that falls in between.

Categories	Most Elastic	In Between	Least Elastic
Vegetables		Yes
Red bell peppers	Yes
Food			Yes

The price elasticity of demand is also affected by the given time horizon.

Other things being equal, the demand for natural gas will tend to be less elastic in the short run than in the long run. Because consumers cannot change their demand in the short run but will choose other alternatives in the long run if the price continues to rise.