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Questions
How does the nature of a commodity affect its price elasticity of demand?
Discuss any three/four factors determining price elasticity of demand.
Solution
- Nature of the goods: More necessary the good for a consumer, less elastic is the demand for the good. This is because it is difficult to give up the consumption of a necessary good.
- Number of substitutes: The greater the number of close substitutes of a good available in the market, the higher the price elasticity of that good. It is because a consumer can easily shift from one substitute to another in case of a price change.
- Number of uses: The greater the number of uses of a good, the more likely is the demand for that good to be elastic.
- Proportion of income spent: The demand for a good will be price elastic if the proportion of income spent on that good is large. It is because the total expenditure on the goods changes considerably.
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