Determinants Of Price Elasticity Of Demand Essay
There are five main factors that determine the quantity of a good that a buyer would demand, they are: Income
If the income of the customer base goes up or down it will change the buying habits of the customers. If the customers have more money to spend then the more goods they will demand. If the customers have less money to spend then they will demand less goods.
2.Prices of related goods
In this factor if a price of a good is lowered and/or falls a demand for complementary products usually goes up. Example: cake icing and cake mixes if one of these were to go on sale there will be more of a demand for the other.
On the other side, if the price of goods rise but there are substitutes and these substitutes remain …show more content…
List and explain the four determinants of price elasticity of demand discussed in Chapter 5. Page 90
The four determinants of price elasticity of demand are
Availability of close substitutes - An example of a close substitute for cow 's milk is goat 's milk, soy milk and so on. In this category, goods with close substitutes are more influenced by price because it is easier for customers to switch to another product.
2. Necessities vs. Luxuries -
In this determinant if the prices go to high the customer decides whether the good is a necessity or luxury. Necessities include food, water, housing, and the like. Luxuries would be like jewelry, art and so on. What is a luxury is a matter of perception, example a horse may be a luxury in New York, however is a necessity in Texas on a cattle ranch.
Definition of the market -
The definition of the market is the pool of information the calculations are gleaned from. How narrow or wide the boundaries are of the market depend on how elastic the demand will be calculated. Example; if the defined market is canned tuna in water the demand is very elastic because other canned tuna in water are almost a perfect