Answer to Question #94236 in Macroeconomics for Sharon

Question

Discuss and critically evaluate three (3) determinants of price elasticity of demand with reference to the manufacturing and service industry

Answer 1

a)Availability of close substitutes

If a product for instance one brand of cement hikes price then it can be substituted by another brand since the products are regarded similar by the client.Products with close substitutes have higher price elasticity of demand

b)Product cost weight in the budget

Products with negligible cost such as salt are not likely to be affected by price changes as opposed to products with high budget allocations such as personal cars.Therefore expensive products have higher price elasticity of demand compared to cheaper products.

c)Period of time

A change of price of a good do not trigger immediate shift in demands because the consumer always need time to realize whether the change is market specific or good specific and identify a suitable replacement for the said good.Therefore price elasticity of demand is higher after 3 years as compared to one month.