Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 2 How Markets Work
Chapter 5 of 36 Elasticity and Its Application
Section 4 of 19
…
The four general factors of determination of price elasticity of demand are:
1· Availability of close substitutes
Goods with close substitutes have more elastic demand because it is easy for consumers to switch to substitutes.
For example butter and margarine are substitutes.
A small increase in the price of butter causes the quantity of butter sold to fall by a large amount, this is elastic demand.
Because eggs have no close substitute, the demand for eggs is less elastic than the demand for butter.
…
2· Necessities versus luxuries
Necessities have inelastic demands, if the price rises people will consume only a little less.
When the price of a doctor visit rises the quantity of doctor visits demanded will not fall much.
Luxuries have elastic demands, if the price rises people will consume much less.
When the price of sailboats rises the quantity of sailboats demanded will fall substantially.
Often, whether a good is a necessity or a luxury depends not on the features and use of the good but on the preferences of the buyer.
For young avid sailors with little concern about their health sailboats might be a necessity with inelastic demand and doctor visits are a luxury with elastic demand.
…
3· Definition of the market
The elasticity of demand in any market depends on the defined boundaries of the market.
Narrowly defined markets have more elastic demand than broadly defined markets because it is easier to find close substitutes for goods.
Food, a broadly defined category, has an inelastic demand because there are no substitutes for food.
Ice cream, a narrow food category, has a more elastic demand because it is easy to substitute other desserts.
…
4· Time period
Goods have more elastic demand over longer time periods.
When the price of gasoline rises, the quantity demanded falls only slightly at first.
But over time, people
· buy more fuel efficient cars
· switch to public transportation
· move closer to where they work
After several years the quantity of gasoline demanded falls substantially.
… …
time period
kikan
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