Question

Consider some determinants of the price elasticity of demand: • The availability of close substitutes • Whether the good is a necessity or a luxury • How broadly you define the market • The time horizon being considered A good with many close substitutes is likely to have relatively demand, since consumers can easily choose to purchase one of the close substitutes if the price of the good rises. A good’s price elasticity of demand depends in part on how necessary it is relative to other goods. If the following goods are priced approximately the same, which one has the most elastic demand? Amputation procedures for diabetes sufferers Diamond necklace The price elasticity of demand for a good also depends on how you define the good. Organize the goods found in the following table by indicating which is likely to have the most elastic demand, which is likely to have the least elastic demand, and which will have demand that falls in between. Categories Most Elastic In Between Least Elastic Red bell peppers Vegetables Food The price elasticity of demand is also affected by the given time horizon. Other things being equal, the demand for natural gas will tend to be elastic in the short run than in the long run.

Answer 1

The necessity of a good

Given that Amputation procedures for diabetes sufferers and a diamond necklace cost the same, the demand for a diamond necklace is more price elastic as compared to amputation procedures. This is because a diamond necklace is a luxury commodity, with minimal necessary value. However, amputation procedures are necessary, hence lower price elasticity.

Definition of the good

Since the price elasticity of demand also depends on how broadly or narrowly the good is defined, clearly narrowly defined markets tend to have more elastic demand than broadly defined markets.

Thus, the market for red bell peppers is most elastic and the market for food is least elastic. The market for vegetables falls in between the two.

Time horizon

The elasticity of demand varies directly with the time period. Goods tend to have more elastic demand over longer time horizons and inelastic demand in the short run because people find it difficult to change their habits and preferences in a short period in response to any change in prices.

Thus, the statement - other things being equal, the demand for natural gas will tend to be elastic in the short run than in the long run - is false. Rather, the demand for natural gas will be inelastic in the short run and more elastic in the long run.