Authors libby rittenberg 249

Determinants of the Price Elasticity of Demand
The greater the absolute value of the price elasticity of demand, the greater
the responsiveness of quantity demanded to a price change. What
determines whether demand is more or less price elastic? The most
important determinants of the price elasticity of demand for a good or
service are the availability of substitutes, the importance of the item in
household budgets, and time.

Availability of Substitutes
The price elasticity of demand for a good or service will be greater in
absolute value if many close substitutes are available for it. If there are lots
of substitutes for a particular good or service, then it is easy for consumers
to switch to those substitutes when there is a price increase for that good
or service. Suppose, for example, that the price of Ford automobiles goes
up. There are many close substitutes for Fords—Chevrolets, Chryslers,
Toyotas, and so on. The availability of close substitutes tends to make the
demand for Fords more price elastic.
If a good has no close substitutes, its demand is likely to be somewhat less
price elastic. There are no close substitutes for gasoline, for example. The
price elasticity of demand for gasoline in the intermediate term of, say,
three–nine months is generally estimated to be about −0.5. Since the
absolute value of price elasticity is less than 1, it is price inelastic. We
would expect, though, that the demand for a particular brand of gasoline
will be much more price elastic than the demand for gasoline in general.

Importance in Household Budgets
Attributed to Libby Rittenberg and Timothy Tregarthen
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