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.Learn More
Elasticity of demand is an economics term meaning the relative change in quantity demanded for a good based on a particular price change. High price elasticity means that a particular change in price causes consumers to significantly reduce the amount of goods purchased.Full Answer >
Price elasticity of demand is an economic concept that can be computed by dividing the percent of change in quantity demanded of a good by the percent of change in the price of the same good. The concept is that changing the price of a good can alter demand for it.Full Answer >
The price elasticity of demand is important because it illustrates the effect that a change in price has on the quantity demanded of a particular good. It may be perfectly elastic, perfectly inelastic or somewhere between the two.Full Answer >
A good example of a price floor is the federal minimum wage in the United States. The minimum wage must be set above the equilibrium labor market price in order to have any significant bearing on the price.Full Answer >