Determinants of Price Elasticity of Demand
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A good's price elasticity of demand is largely determined by the availability of substitute goods.
Learning Objectives
• Explain how a good's price elasticity of demand may be different in the short term than in the long term.
• Relate the existence of close substitutes to a good's price elasticity of demand.
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Key Points o A good with more close substitutes will likely have a higher elasticity. o The higher the percentage of a consumer's income used to pay for the product, the higher the elasticity tends to be. o For non-durable goods, the longer a price change holds, the higher the elasticity is likely to be. o The more necessary a good is, the lower the price elasticity of demand.
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Term
• Substitute Good
A good that fulfills a consumer need in a way that is similar to another good.
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Full Text
The price elasticity of demand (PED) is a measure of how much the quantity demanded changes with a change in price. The PED for a given good is determined by one or a combination of the following factors:
• Availability of substitute goods: The more possible substitutes there are for a given good or service, the greater the elasticity. When several close substitutes are available, consumers can easily switch from one good to another even if there is only a small change in price . Conversely, if no substitutes are available, demand for a good is more likely to be inelastic.
• Proportion of the purchaser's budget consumed by the item: Products that consume a large portion of the purchaser's budget tend to have greater elasticity. The relative high cost of such goods will cause consumers to pay