Question

5. Determinants of the price elasticity of demand

Consider some determinants of the price elasticity of demand:

• The availability of close substitutes

• Whether the good is a necessity or a luxury

• How broadly you define the market

• The time horizon being considered

A good with many close substitutes is likely to have relatively __(Elastic, Inelastic)___ demand since 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?

A.Yacht

B.Amputation procedures for patients with diabetes

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 Beverages Wine Merlot

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

Compared to the short-run demand for oil, the demand for oil in the long run will tend to be ___(less, more, no less nor more)____ elastic.

Answer 1

5. Determinants of the price elasticity of demand

Consider some determinants of the price elasticity of demand:

• The availability of close substitutes

• Whether the good is a necessity or a luxury

• How broadly you define the market

• The time horizon being considered

A good with many close substitutes is likely to have relatively MORE ELASTIC demand since 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?

A. Yacht

B. Amputation procedures for patients with diabetes – It will be least elastic demand as the use of this cannot be postponed and it is a necessary.

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.

Category	Most Elastic	In Between	Least Elastic
Beverages			√
Wine		√
Merlot	√

Beverages – Least Elastic

Wine – In Between

Merlot – Most Elastic

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

Compared to the short-run demand for oil, the demand for oil in the long run will tend to be more elastic.

Answer 2