Can someone here please explain to me factors affecting elasticity of demand, like I read this and I still don't get it
Thanks
Having done Micro 1 at UNSW I can help you out here.
Note that the elasticity of demand is a measure of responsiveness as to a change in price. It is basically the change in quantity demand for a small change in price.
(Keep at the back of your head that according to the law of demand, consumers have a greater willingness to buy more in quantity when the prices are low.)
Analyse the scenarios logically. Consider the elastic side. (I'll leave some for you to do yourself)
Elastic demand implies that a change in price will more greatly affect a consumer's decision to purchase the product.
- If a luxury goes up in price, the consumer would really have to think about if it's worth buying anymore (everyone has different reservation prices). The demand would be elastic because depending on the scenario, even small price changes can largely affect their decision.
- If there are close substitutes, the consumer can just say oh well we can buy the other good then. Hence for a small change in price they probably won't go for the same good anymore, rather go for a similar good.
- In the long run, consumers probably have a better understanding of the market and they also have more money to be flexible with. They now know that if the price changes for something, they can go elsewhere.
Then consider the inelastic ones.
- If a necessity goes up in price, you're still going to buy it. E.g. you will probably buy water no matter what the price is. You need it.
- If there are few substitutes, then if the price goes up by a tiny amount you really can't buy anything else. The consumer's responsiveness is quite low yet again because they can't jump to something else - they will still buy the same product. It would probably have to be a much greater change in price before they go for something else.
- In the short run, consumers have to make their decisions fast. If the price change is minor, they don't have the time to think into the future and will probably buy it anyway.