DETERMINANTS OF PRICE ELASTICITY OF DEMAND (CHAP4: ELASTICITY )

EXISTENCE OF SUBSTITUTES

 Products with many substitutes:

- Demand is more elastic
- Consumers are very responsive to price change
- Turn to other goods / switch products
- Better to reduce price
Ex: buy tea instead of coffèe
 Products with less substitutes:
- Inelastic demand
- Less responsive to price change
- Less choice or no choice/ unique goods
- No suitable substitutes when price increases

INCOME LEVEL

 High income people/group

- Inelastic demand
- Won’t affect the quantity demanded
- Doesn’t affect their budget/ doesn’t lose
much to buy expensive goods
- Can still buy/afford products that has higher price
 Low income people/group
- Elastic demand
- Reduce quantity demanded
- Affect their budget
- They buy less to save money

HABITS

- Inelastic demand
- Can’t cut down consumption of goods
- Increase in price, small change in quantity demanded
Ex: smokers, alcoholics

IMPORTANCE OF GOODS

 Necessity goods
- Inelastic demand
- Buyers continue to purchase to live

 Luxury Goods
- Elastic demand
- Less important and can live without
- Buy less or stop buying when price increase
 DETERMINANTS OF PRICE ELASTICITY OF SUPPLY

PERISHABILITY
 Product that is easily perishable (agricultural products)
- Supply is inelastic
- Cannot store the products for long time
- Increase in price won’t bring much change in quantity supplied
 Product that is less perishable
- Supply is elastic
- Expect price to increase in future.
- Store the products for future sale

AVAILABILITY OF INPUTS/FACTORS OF PRODUCTION

- Inputs such as LLC
- Easily obtained and available
- Supply is elastic

TECHNOLOGY ADVANCEMENTS
- Supply is elastic
- Modern methods of production expand output
- The number of outputs produced in a given time period is high

TIME

 Short Run
- Supply is inelastic
- Insufficient time to organize and adjust their production
( Agricultural product)

 Long Run
- Supply is elastic
- Responsive to price change
- Can adjust their supply or production (manufacturing products)