None of the following factors influence elasticity: demand or income elasticity of supply, degree of competition, cost of production, and prices of substitutes. Elasticity is the degree to which demand or supply responds to a change in price or a change in other economic indicators.
Elasticity is a measure of how quickly changes in price lead to changes in quantity demanded or supplied. Factors that influence elasticity include availability of substitutes, level of income, amount of time available to make a decision, and many other variables.
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What factors influence the elasticity?
These include the number of substitutes, the availability of substitutes, the proportion of income spent, the time frame of the purchase, and the level of commodity inelasticity.
The number of substitutes refers to the amount of alternative goods or services that are viable alternatives. For instance, if there are few substitutes for a product, like a life-saving medication, then it is likely to be highly inelastic due to the lack of alternatives.
However, if there are numerous substitutes for a product, like a type of cereal, then the elasticity of the product would be fairly high due to the availability of alternatives.
The proportion of income spent on the good or service is another significant factor. Products that are considered necessary items usually possess a relatively inelastic demand, compared to more luxury goods which tend to have a higher degree of elasticity due to the fact that they are usually not as essential.
The time frame of a purchase is also important. Goods or services purchased in the immediate future (short-run elasticity) tend to have lower elasticity than those purchased in the long-run (long-run elasticity).
This is due to the fact that the consumer has less of a chance to adjust their spending in the short-run.
Finally, the level of commodity inelasticity also plays a role. If a commodity is determined to be an inelastic good or service, it means that regardless of the change in price, the consumer’s demand for it will not change significantly.
This type of product will possess a low degree of price elasticity and therefore be less sensitive to price changes than other goods and services.
What are the 3 determinants of elasticity?
The three determinants of elasticity are the availability of substitutes, the proportion of income that must be spent on a product, and the amount of time available for consumers to respond to a change in price.
The availability of substitutes for a product is important in determining the elasticity of demand for that product. When there are few substitutes, customers are usually less sensitive to price changes and the demand is said to be relatively inelastic.
On the other hand, when there are many substitutes, customers are usually more sensitive to price changes and the demand is said to be relatively elastic.
The proportion of income that must be spent on a product is another important determinant of elasticity. When a product accounts for a large percentage of a consumer’s income, price changes usually result in a large change in the quantity demanded.
When a product accounts for a smaller percentage of a consumer’s income, price changes usually result in a smaller change in the quantity demanded.
The amount of time available for consumers to respond to a change in price is the third determinant of elasticity. When customers have more time to find a substitute, they are more likely to switch to a less expensive option, making it more elastic; when customers have less time to respond to a change in price, the demand for a product is less elastic.
What are the four factors?
The four factors are the price of inputs, the state of technology, the level of competition in the market, and the preferences of consumers.
Price of inputs refers to the cost of materials, supplies, labour, and capital that companies need to manufacture their products. Companies continually strive to reduce their costs of production by bargaining for lower input prices or by finding less expensive sources of input.
The state of technology is a big factor influencing pricing decisions. High-tech products usually carry a premium price tag because of the research and development required to produce them. Companies need to constantly develop new technologies and products in order to stay competitive.
The level of competition in the market affects pricing decisions. If a market is dominated by a few large companies then those firms can set prices that are higher than average, but if the market is highly competitive then companies must keep their prices low as a way to attract customers.
The preferences of consumers constitute the fourth factor. People usually choose to buy products which offer the best combination of quality and price. Companies that develop products which meet the preferences of consumers often can achieve higher price points than the competition.
Additionally, companies can create products that appeal to a certain segment of the population in order to maximize pricing.
What are the 4 determinants of the price elasticity of demand that are explained in the textbook?
The four determinants of the price elasticity of demand that are explained in the textbook are:
1. Availability of Substitutes: When a good has many close substitutes available, such as cola and non-cola soft drinks, the demand for that good is more elastic, meaning that a price change will have a greater effect on quantity demanded.
On the other hand, when goods have no close substitutes, the demand is usually less elastic.
2. Necessity vs. Luxury: Necessities, such as food and gas, are usually less elastic than luxury goods because they are not easily substituted and we cannot do without them. On the other hand, luxury items, such as certain brands of clothing or automobiles, are generally more elastic as consumers can more easily do without them and substitute them for similar items.
3. Percentage of Income: Highly expensive goods have an elastic demand, since even a small change in price can be a significant percent of a consumer’s income. Goods that are less expensive tend to have an inelastic demand since a small change in price does not significantly impact a consumer’s budget.
4. Proportion of Expenditure: If a good or service makes up a large portion of a person’s total spending, such as housing, then the demand is usually inelastic since they will continue to purchase the good even with a price increase.
If a good or service is a small proportion of spending, such as ice cream, then the demand is usually more elastic since price changes can affect a consumer’s decision-making process.
What 3 factors determine a product’s demand elasticity?
A product’s demand elasticity is determined by three main factors: price, availability of substitutes, and the proportion of income spent on the product.
Price: As the price of a product increases, the demand for that product usually decreases, and vice versa. If a product has a large range of prices, this can result in higher elasticity.
Availability of substitutes: The availability and attractiveness of other, potentially cheaper alternatives can significantly impact the demand elasticity of a product. The more potential substitutes there are, the higher the elasticity; when there are few substitutes, the elasticity is lower.
Proportion of income spent on the product: The proportion of income needed to purchase the product can also impact elasticity. If the item is considered a necessity, people may be less sensitive to price, leading to lower elasticity.
On the other hand, luxury items may have higher elasticity as people are more price-sensitive.
In conclusion, a product’s demand elasticity is largely determined by its price, availability of substitutes, and the proportion of income spent on the product. When these three factors are considered, it is possible to accurately gauge a product’s demand elasticity in the marketplace.
Resources
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