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InterviewSolution
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Discuss the effect of elasticity of demand on: (i) a commodity which has many substitutes. (ii) a small part of the individual’s income spent on a commodity. |
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Answer» (i) Demand for a commodity with a large number of substitutes will be more elastic. The reason is that even a small rise in its prices will induce the buyers to buy the substitute. (ii) The proportion of income spent: Proportion of consumer’s income that is spent on a particular commodity also influences the elasticity of demand for it. Greater the proportion of income spent on the commodity, more is the elasticity of demand for it and vice-versa. Demand for goods like salt, needle, soap, matchbox, etc. tends to be inelastic as consumers spend a small proportion of their income off such goods. When prices of such goods change, consumers continue to purchase almost the same quantity of these goods. However, if the proportion of income spent on a commodity is large, then demand for such a commodity will be elastic. |
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