Economics Assignment - Price Elasticity of Demand

Added on - 31 May 2021

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ECONOMICS2Answer 1:The demand is considered to be elastic when there is a change in the demand of the productwhen the price of that product undergoes a change..The products that have an elastic demand include the luxury goods, expensive and the bigincome groups, the products that are often purchased together and the goods that have manysubstitutes and face a competitive market (Economic online, 2018).
ECONOMICS3The following are few of the factors that affects the price elasticity of demand:The number of the closer substitutes: the more number of substitutes the product has,the greater is its price elasticity. This is due to the reason that the consumers find iteasy to switch between the different substitutes. The example could include the airtravel and the train travel which are considered to be the weak substitutes when itcomes to the inter-continental flights but there are closer substitutes for the journeyswhich include the travel around 200 to 400kms.The cost of switching between the substitutes of the product: there could be costsinvolved when it comes to switching between the products. In such cases, where thereare no costs involved, the demand is elastic and vice versa. In order to illustrate, theservice providers of the mobile phones may sometimes insist on a 12 month contractwhich has the effect of locking in the customers once they have made the choice. So,when a customer goes for it, he cannot change the same within that span of 1 year.The degree of necessity: the goods that are necessary for the survival of the customerface an inelastic demand whereas the products that luxurious in nature would have anelastic demand. This is mainly due to the fact that the consumer would be able toafford the luxurious products only when all of its necessities have been duly fulfilled.In order to illustrate, the country of China produces about 97% of the total output ofthe rare earth metals which gives them a monopoly in the market.The proportion of the income of the consumer which he has allocated to the goods.The product that consumes a higher % of the total income which is being earned bythe consumer is tend to be more elastic.The time which is allowed following the change in the price. The demand is moreelastic when the consumers have a longer period of time to respond to such of the
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