3. 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 luxury
How broadly you define the market
The time horizon being considered
A good with many close substitutes is likely to have relatively 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?
Sports car
Chemotherapy for cancer patients
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: Wine, Merlot, Beverages
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 more elastic in the short run than in the long run.