Please enable JavaScript.

Coggle requires JavaScript to display documents.

Elasticities of Demand, Applications of PED, When price of the good falls,…

- - - - Basic necessities have a more price inelastic demand whilst luxury goods are said to have price elastic demands. This is because when prices of luxury goods increase, consumers are able to cut down substantially their consumption of the good as they do not need it to survive (can make do without it). However, for basic necessities, consumers can only reduce Qdd by less than proportionately as they need it to survive
    - - If the proportion of income spent on a commodity is small, then its demand is likely to be price inelastic. This is because the expenditure on the good only accounts for a small part of household income, and hence no great effort is made to look for substitutes, even when price increases by a relatively large extent
    - - Demand tends to become more price elastic the longer the time period after a price change. This is because:
    - - If a good has many close substitutes, then its demand is likely to be price elastic. Because consumers can easily switch to substitutes when the price of the good rises --> Qdd falls by more than proportionately
      - Goods that are narrowly defined also tend to have more price elastic demands as they have more substitutes (snacks vs lay's potato chips)