Question

Explain four factoro affection price elasticity of demand.

Answer 1

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$\huge{Price}$

One factor that can affect demand elasticity of a good or service is its price level. For example, the change in the price level for a luxury car can cause a substantial change in the quantity demanded. If the luxury car maker has a surplus of cars, it may decrease prices to increase the quantity demanded, and therefore reduce inventory and increase the company's total revenue.


$\huge{Income\:Level}$

Also know as the income effect, the income level of a population also influences the demand elasticity of a good or service. For example, suppose an economy is facing a downturn and many workers are laid off. The shift in the income level of the majority of a population causes luxury items to be more elastic. Suppose there is a decrease in the average income level of an entire economy; luxury items such as luxury cars and flat-screen televisions experience a high elasticity of demand. Many people opt to save money rather than splurge on luxury items during an economic downturn.

$\huge{Substitute\:Avalability}$

If there is a readily available substitute for a good or service, the substitute affects the elasticity of demand of that good or service. The availability of a substitute makes demand for a good or service sensitive to price changes. For example, suppose the price level of Florida oranges increases due to a cold front that passes through the state. A close substitute for Florida oranges is California oranges. A rise in the price of Florida oranges encourages consumers to buy California oranges. 

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