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Briefly discuss the factors that determine the size of elasticity of demand?

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1. Briefly discuss the factors that determine the size of elasticity of demand? (8) Definition of elasticity of demand +1 Some types of elasticity +1 Factors identified (+2) Factors discussed +4 Analysis and Evaluation +2 Elasticity of demand is a measure of the responsiveness of the quantity demanded to changes in the factor affecting it. There are several factors that affect elasticity of demand. One of the factors that affect elasticity of demand is availability of substitutes. This is probably the most important factor influencing the elasticity of a good or service. In general, the more substitutes, the more elastic the demand will be. For example, if the price of a cup of coffee went up by $0.25, consumers could replace their morning caffeine with a cup of tea. This means that coffee is an elastic good because a raise in price will cause a large decrease in demand as consumers start buying more tea instead of coffee. However, if the price of caffeine were to go up as a whole, there is little change in the consumption of coffee or tea because there are few substitutes for caffeine. ...read more.


Similarly, the changes in the price of very cheap goods (such as salt) will not have any effect on their demand, for a very small part of income is spent on such commodities. One other factor is the nature of the commodities whether it?s a necessity or luxury. Generally, the demand for necessaries is inelastic and that for comforts and luxuries of life elastic. This is so because certain goods which are essential to life will be demanded at any price, whereas goods meant for luxuries and comforts can be dispensed with easily if they appear to be costly. Another factor is habit forming goods. Some products which are not essential for some individuals are essential for others. If individuals are habituated of some commodities the demand for such commodities will be usually inelastic and vice versa, because they will use them even when their prices go up. A smoker generally does not smoke less when the price of cigarette goes up. One other factor is postponement of the use of the commodity. ...read more.


In this way he or she could increase revenue. c) Price of A commodity Quantity of B commodity 45 50 50 35 Change in price of A commodity = 11.1 % Change in quantity of B commodity = -30.0 % Elasticity = -2.7 Quantity demanded of one good has fallen down as the price of the other good has increased. Moreover, the Cross elasticity of demand is negative. Consequently, both goods are complements. They are to be used together. Elasticity is above 1 showing that the demand of B good is changing more then the price changing of A good. The price of the A commodity must be reduced in order to maximize revenue. d) Price Quantity 45 50 5 30 Change in price = - 88.8 % Change in quantity = -40.0 % Elasticity = 0.45 As the price of the commodity decreases, the demand of the commodity decreases. The price elasticity of demand of the commodity is below 1 so the demand is inelastic. A big change in price produced a short change in demand. So the demand of commodity is less responsive. The increase in price will increase the revenue. The commodity don?t have many substitutes and is a necessary good. ...read more.

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