Question

Page 114 4.1. What is the price elasticity of demand, and what are its determinants? Describe how price elasticity of demand is different for necessities versus luxury goods. Drag word(s) below to fill in the blank(s) in the passage. When the price of a necessity increases, demand is likely to be – because consumers –that product to survive. However, when the price of a luxury good increases, consumers may –because the good is not crucial to survival. Thus, the demand would be –.

Answer 1

The "Price Elasticity of Demand" measures the change in quantity demand for a good or service in relation to change in price.

Price Elasticity of Demand = % change in quantity demanded / % change in price

Based on this calculation,

When price elasticity of demand is greater than 1, the good is considered elastic. In other words, a change in price has a greater impact on the change in quantity demanded.

When price elasticity of demand in less than 1, the good is considered inelastic. In other words, the change in price has a relatively lower impact on the change in quantity demanded.

Some of the determinants of "Price Elasticity of Demand" are as follows -

1. Luxury or Necessity - When a good is a necessity, the price elasticity of demand tends to be inelastic. Consumers have to buy the product even if prices trend higher. However, when a good is a luxury good, the price elasticity of demand tends to be elastic. Consumers can reduce consumption of the good when prices trend higher.

2. Availability of Substitutes - When a good or services has several substitutes in the market, the demand tends to be elastic. However, if there are little or no substitutes for the good, the demand tends to be inelastic.

Fill In The Blanks

When the price of a necessity increases, demand is likely to be Inelastic because consumers Need that product to survive. However, when the price of a luxury good increases, consumers may Reduce Consumption because the good is not crucial to survival. Thus, the demand would be Elastic.