What will be the elasticity of demand if it has close substitutes?
A good with more close substitutes will likely have a higher elasticity. The higher the percentage of a consumer’s income used to pay for the product, the higher the elasticity tends to be. For non-durable goods, the longer a price change holds, the higher the elasticity is likely to be.
How does number of substitutes affect price elasticity of demand?
The Price Elasticity of Demand for a good, with a large number of substitutes available, is very high. Thus, the availability of a large number of close substitutes increases the sensitivity against change in price, or we can also say that this increases the Price Elasticity of Demand.
Do substitutes have elastic demand?
Substitutes: Two goods that are substitutes have a positive cross elasticity of demand: as the price of good Y rises, the demand for good X rises. Two goods may also be independent of each other. In this instance, if the price of one good changes, demand for the other good will stay constant.
Does a good without any close substitutes have elastic demand?
A good without any close substitutes is likely to have relatively (elastic, inelastic) demand since consumers cannot easily switch to a substitute good if the price of good rises.
What is close substitute goods?
Close substitute goods are similar products that target the same customer groups and satisfy the same needs, but have slight differences in characteristics. Sellers of close substitute goods are therefore in indirect competition with each other. Beverages are an example.
Why is elasticity 1 at the revenue maximizing price?
Increases in price will offset the decrease in number of units sold, but increase your total revenue. If elasticity is 1, the total revenue is already maximized, and you would advise that the company maintain its current price level.
How is a price elasticity of demand of a good influenced by availability of its close substitute explain by giving an example?
The larger the number of close substitutes of a good available in the market, greater the elasticity for that good. For example, tea and coffee are close substitutes. ADVERTISEMENTS: If the price of tea rises, consumers may curtail the consumption of tea and purchase coffee and versa.
What effect does the availability of many substitutes have on the elasticity of demand for a good?
The availability of alternatives or substitute goods can affect demand elasticity. Hence, the demand for goods or services with many substitutes is highly price elastic; a small increase in the price levels of goods causes consumers to buy its substitutes.
What is an example of unit elastic demand?
The unit elastic theory assumes that there’s another similar good on the market at a competitive price. Example: An office supply store sells a specific type of pen for $1.41. It sells 1,000 of these pens per month, making a profit of $1,410. The owner believes the store could sell more pens if the price was lower.
What product is likely to have the most elastic demand?
Goods with close substitutes tend to have more elastic demand because it is easier for consumers to switch from such a good to others. In contrast, goods without close substitutes, such as a unique life-saving medicine, have a less elastic demand.
Which of the following is likely to have the most price elastic demand?
The correct option is a): diamond earrings. If the demand of a commodity is highly responsive to price changes, the commodity is price elastic. The other options do not have a price elasticity of demand as high as diamond earrings because the other three products mentioned here are essential commodities.
What is close substitutes in economics?
Economic theory describes two goods as being close substitutes if three conditions hold: products have the same or similar performance characteristics. products have the same or similar occasion for use and. products are sold in the same geographic area.
How does the availability of substitute goods affect elasticity?
Thus, the availability of substitute goods affects the elasticity of demand for goods or services. Demand for goods or services with many elastic substitutes because consumers have many choices. That means, when the price of an item rises slightly, consumers will switch to its substitute. Consider two soap products with different brands.
Why is there no cross elasticity of demand?
Products with no substitutes have the ability to be sold at higher prices because there is no cross elasticity of demand to consider. However, incremental price changes to goods with substitutes are analyzed to determine the appropriate level of demand desired and the associated price of the good.
When is the demand for a substitute product inelastic?
Product demand is inelastic when there is no substitute or little available. In contrast, when there are many substitutions available, the demand is elastic. Substitute product is an alternative product that provides similar satisfaction. Remember, in economics, another term for product satisfaction is utility.
Why are necessities more elastic than luxury goods?
The more (and closer) substitutes available in the market the more elastic demand will be in response to a change in price. Necessities tend to have a more inelastic demand, whereas luxury goods and services tend to be more elastic. For example, the demand for cinema tickets is more elastic than the demand for bus travel.