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 without any close substitutes is likely to have relatively   demand, because consumers cannot easily switch to a substitute good 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 most elastic demand?

Sports car

Amputation procedures for patients with diabetes

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?

Monthly cell phone bill

Thumbtacks

Fish food

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
Wine
Beverages
Merlot

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

If the price of gasoline is relatively high for a long time, consumers are more likely to buy fuel-efficient cars or switch to alternatives such as public transportation. Therefore, the demand for gasoline is   elastic in the short run than in the long run.

Answer 1

Ques 1 - A good without any close substitutes is likely to have relatively__________ demand, because consumers cannot easily switch to a substitute good if the price of the good rises

Ans 1 - A good without any close substitutes is likely to have relatively inelastic demand.

Ques 2 - 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 most elastic demand? Sports car Amputation procedures for patients with diabetes

Ans 2 - Sports car will have more elastic demand as the greater the necessity of the product, the less elastic, or more inelastic, the demand will be, because substitutes are not available. The more luxurious the product is, the more elastic demand will be.

Ques 3 - 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? Monthly cell phone bill Thumbtacks Fish food

Ans 3 - Monthly cell phone bill will have most elastic demand because the larger the share of an item in one’s budget, the more price elastic demand is likely to be while the smaller the share of an item in one’s budget, the more price inelastic demand is likely to be.

Ques 4 -

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.

Ans 4 -

Wine - in between Beverages - least inelastic Merlot - most elastic

Ques 5 - If the price of gasoline is relatively high for a long time, consumers are more likely to buy fuel-efficient cars or switch to alternatives such as public transportation. Therefore, the demand for gasoline is __________ elastic in the short run than in the long run. Ans 5 - The demand for gasoline generally is fairly inelastic in the short run than in long run