Main Determinants Of Price Elasticity Of Demand Essay

803 Words Dec 1st, 2015 4 Pages
As we know the law of demand, consumer will respond to a price decrease by buying more of a product. This is a marketing technique used by many firms to gain profit. Price elasticity of demand implies the responsiveness or sensitivity of quantity demanded of a good or a service by consumers to a change in its price, all other things remaining constant. For instance, if the demand is elastic then there is a large change in quantity demanded even when price changes by a small amount; whereas when demand is inelastic there is a very small change in quantity demanded, even when there is a large change in price. According to Mc Connell textbook, there are arounds three main determinants of Price Elasticity of Demand. The first one is the availability or not of substitute goods. Indeed, the more possible substitutes there are for a given good or service, the greater the elasticity. When several close substitutes are available, consumers can easily switch from one good to another even if there is only a small change in price . Whereas, if no substitutes are available, demand for a good is more likely to be inelastic. A second determinant of Price Elasticity is the consumer’s budget, as products that consume a large portion of the purchaser 's budget tend to have greater elasticity. If the product has a high cost, then consumers will to pay more attention to the purchase and seek substitutes. In contrast, demand will tend to be inelastic when a good represents only a negligible…

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