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.

THIS IS THE MAIN DETERMINANT!

· 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.