๐ Topic Summary
Price elasticity of demand (PED) measures how much the quantity demanded of a good changes when its price changes. Several factors influence PED, making some goods more sensitive to price changes than others. These determinants include the availability of substitutes, the necessity of the good, the proportion of income spent on the good, and the time horizon considered. Understanding these determinants helps businesses predict how changes in price will impact their sales and revenue. ๐ค
For example, a product with many substitutes will have a higher PED because consumers can easily switch to alternatives if the price increases. Conversely, a necessary good with few substitutes will have a lower PED, as consumers will continue to purchase it even if the price rises. The longer the time horizon, the more elastic the demand tends to be, as consumers have more time to adjust their consumption habits and find alternatives. โณ
๐งฎ Part A: Vocabulary
Match the terms with their definitions:
| Term |
Definition |
| 1. Price Elasticity of Demand |
A. The percentage change in quantity demanded divided by the percentage change in price. |
| 2. Substitutes |
B. Goods that can be used in place of one another. |
| 3. Necessities |
C. Goods that consumers will continue to buy regardless of price changes. |
| 4. Proportion of Income |
D. The percentage of a consumer's income spent on a particular good. |
| 5. Time Horizon |
E. The period over which demand is measured. |
Answers: 1-A, 2-B, 3-C, 4-D, 5-E
โ๏ธ Part B: Fill in the Blanks
Complete the following paragraph with the correct words:
The price elasticity of demand is affected by several factors. If there are many ______ available, demand tends to be more elastic. For ________, demand is generally inelastic. The larger the ________ of income spent on a good, the more elastic the demand. Finally, the longer the ________, the more elastic demand becomes.
Word Bank: substitutes, necessities, proportion, time horizon
Answers: substitutes, necessities, proportion, time horizon
๐ค Part C: Critical Thinking
Explain how the availability of close substitutes affects the price elasticity of demand for a product. Provide an example to illustrate your point.
Answer Guide: When close substitutes are readily available, consumers can easily switch to alternatives if the price of a particular product increases. This makes the demand for that product more elastic. For example, if the price of one brand of coffee increases significantly, consumers can easily switch to another brand or to tea, resulting in a substantial decrease in the quantity demanded of the original brand. โ