Economics: Principles, Problems, and Policies, 19th Edition

Published by McGraw-Hill Education
ISBN 10: 0073511447
ISBN 13: 978-0-07351-144-3

Chapter 4 - Elasticity - Questions: 3

Answer

Bottled water has a low price elasticity of demand (PED) due to the necessity of the good, where there is a biological need for people to drink water, and there lacks a substitute to water. Tooth-paste also would have a low PED due to its necessity, as people would need to use toothpaste on a daily basis, and there is a lack of substitutes to tooth-paste as well, due to the broad definition of the product. Crest toothpaste would have a higher PED to the more specific definition of the good, where there are more substitutes in the form of other brands of tooth-paste, such as Colgate. Ketchup would also have a lower PED, due to the cheaper nature of the good, thus less proportion of income is spent on it, and there is also a lack of substitutes to the good. Diamond bracelets would have a high PED, due to the high proportion of income spent on it, and consumers would thus be more responsive to changes in price. Microsoft Window's operating system would have a high PED, due to competition from other companies such as Apple, and the relatively high proportion of income spent on it. (this market would actually have a kinked demand curve with changing PED, due to the fact that it is an oligopoly, which would be introduced later)

Work Step by Step

The main determinants of price elasticity of demand (PED), are the proportion of income spent on the good, the necessity of the good, the availability of substitutes and the definition of the good. As the proportion of income spent increases, the PED increases as consumers are more responsive to changes in price. The more a good is deemed a necessity, the lower the PED as consumers would have no choice but to purchase these items regardless of their price (the availability works similarly, where consumers would not have much choice between goods to choose from). The broader the definition of a good, the more substitutes would be available and thus the higher the PED.
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