A variety of factors affect demand elasticity. Knowing these
factors can help us predict whether a product will exhibit elastic
or inelastic demand.
- availability of close substitutes
- Readily available close substitutes mean demand will be more elastic. If price rises, consumers can switch to the substitutes easily,
causing demand to fall significantly. If price falls, consumers
who were already purchasing the substitutes can switch back, causing
demand to rise.
- price relative to income
- "Expensive" products have a more elastic demand; any given % change in price means a larger change in
dollar amount the more the product costs. A 2% change in the
price of pencils may be meaningless, but a 2% change in the price
of a house can be several thousand dollars.
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