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9 May, 04:22

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?

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  1. 9 May, 04:43
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    Answer: A, B and D are some of the determinants of price elasticity of demand.

    The availability of close substitutes

    Whether it is a necessity or luxury

    Time horizon.

    Explanation:

    A. Availability of close substitutes is an important determinant of price elasticity of demand. If close substitutes are available for a commodity, demand for the commodity will be "elastic". Whenever, the price of the commodity with close substitutes goes up, people will neglect it and shift to its close substitutes that are lower in prices. This will reduce the demand of the commodity greatly.

    At the other hand, when there is no close substitute for a commodity, the demand for the commodity will tend to be "inelastic"; people will have to buy it even when the price of the commodity rises.

    B. Whether the good is a necessity or a luxury:

    A good or service may be a necessity or luxury. Luxury goods are sensitive to price changes, thus a great elasticity of demand set in. On the other hand, necessary/unavoidable goods are generally "inelastic".

    Examples of luxury goods are air conditioner, television, android phones etc. Suppose the prices of air conditioners decrease by 40%, the demand will increase because customers will purchase them easily. Customers that were unable to purchase air conditioners before would purchase them now.

    Food and shelter are good examples of necessary goods. People have to eat to survive and improve growth. Thus, people will buy food even if the price of food changes.

    C. Time horizon:

    Price elasticity of demand varies with time period. Demand is "inelastic" in a short period and more "elastic" in long period. Customers do find it difficult to change their habit within a short period or adapt at a short period in order to respond to a change in price of a commodity. But when given long period for change, some customers might change/adapt to the change in price of the commodity while other customers that find it difficult could shift to other substitutes for the commodity.
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