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Determinants of elasticity of demandPowerPoint Presentation

Determinants of elasticity of demand

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### Determinants of elasticity of demand

Different products have different elasticity values. It is thought there are factors that lead to certain elasticity values.

Different elasticities

P

We see the same price change along both curves, but the flatter curve has a greater quantity response. If you worked out the elasticity, you would see the flatter curve is more elastic than the steep curve in any price range.

Q

Determinants of elasticity

- Some determinants are
- The number of substitutes a product has,
- The % of the consumer budget the item costs,
- Time.

# of Subs.

- The more substitutes an item has the more likely the quantity demanded will respond to a price change.
- Thus, the more subs. there are the greater the elasticity.

% of consumer budget

- The greater the % of your budget the greater is the elasticity.
Let’s use milk as an example. Milk purchases by the typical consumer likely takes a relatively small percentage of the budget for a consumer. Changes in the price elicit almost no change in the quantity demanded.

A few years back the government taxed yachts and this raised the price of yachts. The Gov thought rich people would go on buying. Many buyers though said I’ll keep my current yacht longer because this increase is too much of my budget. The price change had a significant on the quantity demanded.

Time

- The longer the time period since the price change, the more elastic demand tends to be. To a certain extent because the longer time since the price change the more time we have to find substitutes. With home heating fuels if the price goes up in short term we buy but in long term we buy less and wear a sweater or search for other methods.