Determinants Of Elasticity Essay

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Determinants of Elasticity http://www.aviation.dft.gov.uk/aed/air/aircont.htm
Number of Substitutes The demand for goods with many substitutes are likely to be elastic.
The demand for goods with zero or very few substitutes is likely to be inelastic.
Examples
1. Heart Medicine Inelastic because there are relatively few substitutes and many people need the medicine to stay well. Qd would not fall much even if price increased dramatically. 2. Bread elastic because there are many substitutes. If the P of Wonder Bread increased many people would choose another brand. As a result, Qd for Wonder Bread would decrease greatly. Luxuries vs. Necessities
ExamplesHeart Medicine & Food Necessities are likely to be inelastic (wouldn’t be a great decrease in Qd). However, if the price of a luxury (elastic)good increase, people are more able to cut back on the Qd. Percentage of Income Spent on the Good.
Suppose Michelle has a monthly income of $2000. She spends $20 on paper (1% of income) and $400 on dinners (20% of income) monthly. Now Suppose the P of paper and the P of dinner double. What would Michelle more likely change, the Qd of paper or restaurants? The Qd of restaurants because she would feel the price change more strongly, because it affects a larger % of her income. In short, buyers are more responsive to price changes in goods on which they spend a larger % of their income. She spends $20 on paper (1% of income) inelastic spend small % of income $400 on dinners (20% of income) elastic

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