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Economics explained



Determinants of price elasticity of demand

Determinants of price elasticity of demand

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Determinants of price elasticity of demand

The number and closeness of substitute goods.

The more substitutes there are for a good and the closer they are, the more people will switch to these alternatives when the price of the good rises: the greater, therefore, will be the price elasticity of demand.

A good example would be in the case of canned drinks where there are many types of cola, iced tea and fruit juice so a small change in price could see quite large changes in what consumers purchase.

The proportion of income spent on the goods.

The higher the proportion of our income we spend on a good, the more we will be forced to cut consumption when its price rises: the bigger will be the income effect and the more elastic will be the demand

For example, a 10% increase in the price of a flight to China will have a bigger impact than a 10% rise in the price of a bus trip into town.

The time period.

When price rises, people may take a time to adjust their consumption patterns and find alternatives.

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