Price Elasticity of Demand - DOC

Document Sample
Price Elasticity of Demand - DOC Powered By Docstoc
					What are the major determinants of price elasticity of demand? Use those determinants and your own reasoning in judging whether demand for each of the following products is elastic or inelastic. a. Bottled water; b. Toothpaste; c. Crest toothpaste; d. Ketchup; e. Diamond bracelets; f. Microsoft Windows operating system.

Determinants of price elasticity of demand: I. Number of close substitutes within the market: The more the availability of close substitutes in the market the more elastic demand will be in response to a change in price. In this case, the substitution effect will be quite strong. II. Percentage of income required by an item: Products requiring a larger percentage of the consumer’s income tend to have greater elasticity. III. Time period under consideration: Elasticity tends to be greater over the long run because consumers have more time to adjust their behavior to price changes. Demand for each of the products are : a. Bottled water: There are many close substitute of the product in the market like soft drinks, juices, etc. so it’s elastic. b. Toothpaste: There is no exact substitute of the toothpaste (although there are mouth wash available but they fail to get treated as a close substitute of the tooth paste). It’s Inelastic c. Crest toothpaste: Since this particular brand does not have much liking or is less popular so elastic. d. Ketchup: Although other hot and spicy sauces are available in the market but they don’t fit every where then the ketchup is therefore it’s an Inelastic product. e. Diamond bracelets:

One can use other jewelry instead of bracelets so it stands elastic. f. Microsoft Windows operating system: Other operating system do exists in the market but they have very minor popularity, awareness and superiority as compared to Microsoft Windows operating system posses so it’s quite Inelastic.

Description: Brief definition of Price Elasticity of Demand with examples.