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| 1. |
How is price elasticity of demand affected by: (i) Number of substitutes available for the good, (ii) Nature of the good. |
| Answer» SOLUTION :1. Nature of the Good:The elasticity of demand for a good depends upon the nature of the good, i.e., whether the good is a NECESSARY or a luxury good. The elasticity of demand for a necessary good is relatively small. For example, if the price of such a good rises, its buyers generally are not able to reduce its demand.2. Availability of Substitute GOODS:If close substitutes for a PARTICULAR good are available in the market, then the demand for the good would be relatively more elastic. For example, SINCE tea, a close substitute for coffee, is available in the market, a rise in the price of coffee would result in a considerable fall in its demand and a consequent rise in the demand for tea | |