Explain by giving example how
following determine price of elasticity of demand
(1) Nature of two goods
(2) Availability of subsitute
Answers
Answer :
Factors Determining Price Elasticity of demand
1. Nature of the Goods :
Elasticity of a good depends on whether it is a necessary or a luxury. If it is a necessary good elasticity would be low. If it is a luxury good it will have a high elastic demand.
Eg : Normal goods and inferior goods.
• Normal Goods : In case of normal goods, when the income of Consumer increases and the demand also increases. And income Decreases , demand also decreases.
• Inferior Goods : Goods whose demand decreases when consumer's income increases and when demand increases, the income Decreases.
2. Availability of Substitute :
Substitute Goods will always have highly elastic demand, while non-substitute goods will have inelastic demand.
Eg : Substitute goods, and complementory goods
• Substitute goods : Goods that are used as substitutes to satisfy a need are called substitute Goods.
• Complementory Goods : When more than one good is required to satisfy a want is called complementory goods.