Q:

What are the major determinants of price elasticity of demand?

A:

Price elasticity of demand illustrates how the quantity demanded of a good is affected by the change in price of that good. The determinants of price elasticity of demand are the availability of substitutes, size, durability and time.

The number of available substitutes is a key determinant of price elasticity of demand. The more substitutes a good has, the greater price elasticity of demand it has. A seller of a good with many substitutes has less ability to raise the price because consumers will switch to a lower priced substitute. Brand loyalty decreases when the number of substitute goods increases.

The size of the expenditure also affects price elasticity of demand. A low-priced good has less price elasticity because the price is such a small percentage of a consumer's income. For example, a change in the price of nails will have less effect than a change in the price of cars.

Durability affects price elasticity of demand of a good because consumers continue to use older goods when sellers raise the price of new goods. Perishable goods do not offer consumers the option of using older goods.

Time is the final determinant of price elasticity of demand. In the short run, consumers continue purchasing the same amount of a good when the price rises. However, as more time passes, consumers adjust their purchasing behavior.

Sources:

  1. uri.edu

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