Determinants of price elasticity of demand include which of the following?

Determinants of price elasticity of demand include which of the following?

• A. Substitutes; Proportion of income; Luxury or necessity; Addictive or not; Time to respond
• B. The color of the product; The marketing budget; The number of stores; The flavor
• C. Government policy; Tax policy; Exchange rates; Interest rates
• D. Production costs; Number of firms; Market size; Advertising spend

Answer: (A)

Price elasticity of demand measures how much the quantity demanded changes when price changes. The main factors that determine this are: whether there are readily available substitutes, how large a share of income the good represents, whether it is a luxury or a necessity, whether the good is addictive, and how much time buyers have to adjust. If plenty of substitutes exist, consumers can switch easily when price rises, making demand more elastic. When a good takes up a big portion of a consumer’s budget, price changes lead to bigger changes in quantity demanded, so elasticity is higher. Luxuries tend to be more elastic than necessities, because people can cut back on luxuries when prices rise. Addictive goods often have inelastic demand since consuming persists despite price increases. Finally, elasticity tends to rise over time: in the long run people find alternatives or adjust habits, so quantity demanded becomes more responsive to price. The first option lists all these factors—substitutes, proportion of income, luxury versus necessity, addictive or not, and time to respond—so it best matches the determinants of price elasticity of demand. The other options include traits that don’t determine how responsive demand is to price, such as sensory attributes (color, flavor), marketing or store count, government policy or macro rates, and production costs or advertising affecting supply or market size rather than demand responsiveness.

Price elasticity of demand measures how much the quantity demanded changes when price changes. The main factors that determine this are: whether there are readily available substitutes, how large a share of income the good represents, whether it is a luxury or a necessity, whether the good is addictive, and how much time buyers have to adjust. If plenty of substitutes exist, consumers can switch easily when price rises, making demand more elastic. When a good takes up a big portion of a consumer’s budget, price changes lead to bigger changes in quantity demanded, so elasticity is higher. Luxuries tend to be more elastic than necessities, because people can cut back on luxuries when prices rise. Addictive goods often have inelastic demand since consuming persists despite price increases. Finally, elasticity tends to rise over time: in the long run people find alternatives or adjust habits, so quantity demanded becomes more responsive to price.

The first option lists all these factors—substitutes, proportion of income, luxury versus necessity, addictive or not, and time to respond—so it best matches the determinants of price elasticity of demand. The other options include traits that don’t determine how responsive demand is to price, such as sensory attributes (color, flavor), marketing or store count, government policy or macro rates, and production costs or advertising affecting supply or market size rather than demand responsiveness.