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Monday, February 7, 2011

What determines price elasticity?

· The number of substitutes - the greater the substitutes, the more elastic the good - a small price rise means consumers switch to another brand.
· The proportion of income - the greater the proportion of income going on good, the more elastic it tends to be. Salt is relatively inelastic and very cheap - would you consume a £2’s worth a year?
· Luxuries and necessities - luxuries tend to be more elastic (airfares, foreign travel); necessities more inelastic (electricity). Some economists do not like this “luxuries” point because what constitutes a luxury alters too much and in addition they can be personal to different individuals.
· Time - the longer the time, the more elastic demand tends to be, probably because
· More substitutes become available , the good or service is copied by others, new manufacturers
can enter, imports be made etc.
· Habits change only slowly, so we adjust to new prices slowly.
· Capital may need to wear out to make change, e.g., if the price of petrol rises, drivers have
to wait until it is time to buy a new and smaller car in order to reduce petrol consumption.

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