What are the determinants of demand elasticity?

23. What are the determinants of elasticity of demand and supply?

• Answer:

  Determinants of PED; A number of factors determine the elasticity: * Substitutes: The more substitutes, the higher the elasticity, as people can easily switch from one good to another if a minor price change is made * Percentage of income: The higher the percentage that the product's price is of the consumers income, the higher the elasticity, as people will be careful with purchasing the goods because of its cost * Necessity: The more necessary a goods is, the lower the elasticity, as people will buy it no matter the price, such as insulin * Duration: The longer a price change holds, the higher the elasticity, as more and more people will stop demanding the goods (i.e. if you go to the supermarket and find that blueberries have doubled in price, you'll buy it because you need it this time, but next time you won't, unless the price drops back down again) * Breadth of definition: The broader the definition, the lower the elasticity. For example, Company X's fried dumplings will have a relatively high elasticity, where as food in general will have an extremely low elasticity (see Substitutes, Necessity above) Determinatnts of PES; The determinants of the price elasticity of supply are: The existence of the naturally occurring raw materials needed for production; the length of the production process; the production spare capacity (the more spare capacity there is in an industry the easier it should be to increase output if the price goes up); the time period and the factor immobility (the ease of resources to move into the industry); the storage capacity of the merchants (if they have more goods in stock they will be able to respond to a change in price more quickly);