Question

Write any three factors affecting the Elasticity of Demand.

Hint:

To quickly assess elasticity, ask yourself: "How easily can I do without this product or switch to another if the price goes up?" If the answer is "very easily," the demand is elastic. If it's "not easily," the demand is inelastic.

Answer 1

Step 1: Understanding the Concept:
Price Elasticity of Demand measures the responsiveness of the quantity demanded of a good to a change in its price. The question asks for three factors that influence this responsiveness.

Step 2: Detailed Explanation:
Three key factors affecting the Price Elasticity of Demand are: \begin{enumerate}[label=\arabic*.] \item Availability of Close Substitutes: \begin{itemize} \item If a good has many close substitutes (e.g., Pepsi and Coke), its demand is highly elastic. A small increase in the price of one will cause consumers to switch to the other, leading to a large drop in quantity demanded. \item If a good has few or no close substitutes (e.g., salt, life-saving drugs), its demand is inelastic. Consumers have no alternative, so they will continue to buy it even if the price increases. \end{itemize} \item Nature of the Commodity: \begin{itemize} \item Necessities (e.g., food, medicine) have inelastic demand because consumers need them regardless of the price. \item Luxuries (e.g., sports cars, designer clothes) have elastic demand because their consumption can be easily postponed or avoided if the price rises. \end{itemize} \item Proportion of Income Spent on the Good: \begin{itemize} \item Goods on which a consumer spends a very small proportion of their income (e.g., a matchbox, a newspaper) tend to have inelastic demand. A price change doesn't significantly impact the consumer's budget. \item Goods on which a consumer spends a large part of their income (e.g., a car, a house) have elastic demand. A price increase will have a major impact on the budget, making the consumer very responsive to the price change. \end{itemize} \end{enumerate}

Step 3: Final Answer:
Three factors affecting the elasticity of demand are the availability of close substitutes, the nature of the commodity (necessity vs. luxury), and the proportion of income spent on the good.