From the following determinants of the price elasticity of demand, indicate the correct code for the determinants having a positive relationship with the degree of the price elasticity of demand: (a) Range of substitutes of the commodity (b) Extent of the different uses of the commodity (c) Portion of the income of the buyer spent on the commodity (d) Income group of buyers purchasing the commodity
(a), (b) and (c) only
Understanding Price Elasticity of Demand and its Determinants
Price elasticity of demand measures how sensitive the quantity demanded of a good is to a change in its price. If demand is elastic, a small price change leads to a large change in quantity demanded. If demand is inelastic, a price change has little effect on quantity demanded. Several factors, known as determinants, influence the degree of price elasticity of demand. The question asks us to identify which of the given determinants have a positive relationship with the degree of price elasticity. A positive relationship means that as the determinant increases, the degree of price elasticity also increases.
Analyzing the Determinants of Price Elasticity
Let's examine each determinant provided in the question:
- (a) Range of substitutes of the commodity: The availability of close substitutes is a major determinant of price elasticity. If a commodity has many close substitutes, consumers can easily switch to alternatives if the price of the original commodity increases. This makes the demand for the commodity more sensitive to price changes, hence more elastic. Therefore, there is a positive relationship between the range of substitutes and the degree of price elasticity of demand.
- (b) Extent of the different uses of the commodity: If a commodity can be used for multiple purposes, a rise in its price might cause consumers to reduce or eliminate less important uses, while perhaps continuing essential uses. This leads to a relatively larger decrease in the total quantity demanded as price increases. Conversely, if the price falls, consumers might find new uses or increase consumption for existing uses. This makes the demand more responsive to price changes, thus more elastic. So, there is a positive relationship between the extent of different uses and the degree of price elasticity of demand.
- (c) Portion of the income of the buyer spent on the commodity: The proportion of a buyer's income spent on a commodity affects how a price change impacts their overall budget. If a commodity represents a significant portion of income (e.g., housing, cars), a change in its price will have a large impact on the buyer's purchasing power. This makes buyers more sensitive to price changes, leading to more elastic demand. Conversely, if a commodity is a small part of income (e.g., salt, matches), a price change has little impact on the budget, and demand tends to be inelastic. Thus, there is a positive relationship between the portion of income spent and the degree of price elasticity of demand.
- (d) Income group of buyers purchasing the commodity: While the income *level* of buyers can influence the demand for certain types of goods (e.g., necessities vs. luxuries), simply stating the "income group" doesn't establish a universal positive or negative relationship with the *degree* of price elasticity for *all* commodities purchased by that group. Elasticity is determined by the nature of the good itself, the availability of substitutes, necessity, etc., which might be bought by different income groups. For example, staple foods (inelastic) are bought by all income groups, while luxury goods (elastic) are bought primarily by higher income groups. The elasticity is more a characteristic of the good than the income group buying it in isolation. Therefore, this factor does not have a clear, direct positive relationship with the *degree* of price elasticity of demand in the same way as the others.
Identifying Determinants with a Positive Relationship
Based on the analysis:
- (a) Range of substitutes: Positive relationship (More substitutes → Higher elasticity)
- (b) Extent of different uses: Positive relationship (More uses → Higher elasticity)
- (c) Portion of income spent: Positive relationship (Larger portion → Higher elasticity)
- (d) Income group of buyers: No direct, clear positive relationship for all commodities
Therefore, the determinants having a positive relationship with the degree of the price elasticity of demand are (a), (b), and (c).
Conclusion
The correct code indicating the determinants having a positive relationship with the degree of the price elasticity of demand is (a), (b) and (c) only.
| Determinant | Relationship with Price Elasticity | Explanation |
|---|---|---|
| (a) Range of substitutes | Positive | More substitutes means consumers can easily switch if price rises, increasing elasticity. |
| (b) Extent of different uses | Positive | More uses mean consumers can cut back on non-essential uses if price rises, increasing elasticity. |
| (c) Portion of income spent | Positive | Larger portion means price change has bigger budget impact, increasing sensitivity and elasticity. |
| (d) Income group of buyers | Not a direct, universal positive relationship | Elasticity is more determined by the nature of the good itself and factors like substitutes/necessity. |
Revision Table: Key Factors for Elasticity
Understanding these determinants helps predict how demand will react to price changes.
| Factor | Impact on Elasticity |
|---|---|
| Availability of Substitutes | More substitutes $\rightarrow$ More Elastic |
| Proportion of Income | Larger proportion $\rightarrow$ More Elastic |
| Necessity vs. Luxury | Luxury $\rightarrow$ More Elastic; Necessity $\rightarrow$ More Inelastic |
| Time Horizon | Longer time $\rightarrow$ More Elastic (more time to find substitutes/adjust) |
| Addictiveness/Habit-forming | Addictive $\rightarrow$ More Inelastic |
| Number of Uses | More uses $\rightarrow$ More Elastic |
Additional Information: Understanding Price Elasticity of Demand
Price elasticity of demand ($\text{E}_d$) is calculated using the formula:
$\text{E}_d = \frac{\% \text{ Change in Quantity Demanded}}{\% \text{ Change in Price}}$
Economists typically use the absolute value of $\text{E}_d$ because the relationship between price and quantity demanded is usually inverse (due to the Law of Demand). The degree of elasticity is categorized as follows (using absolute values):
- $\text{E}_d > 1$: Demand is elastic (Quantity demanded is highly responsive to price changes).
- $\text{E}_d = 1$: Demand is unit elastic (Quantity demanded changes by the same percentage as price).
- $\text{E}_d < 1$: Demand is inelastic (Quantity demanded is not very responsive to price changes).
- $\text{E}_d = \infty$: Demand is perfectly elastic (Consumers will buy any quantity at one price, and none if the price increases).
- $\text{E}_d = 0$: Demand is perfectly inelastic (Quantity demanded does not change at all when the price changes).
Understanding the determinants helps businesses predict how sales might change if they alter prices and helps policymakers understand the potential impact of taxes or subsidies on consumption.
Important Questions from Demand analysis
The supply curve of cars is expected to shift rightwards with:
i. An increase in the price of cars
ii. A decrease in fuel prices
The supply curve of a normal good is ____________ sloping. It depicts ___________ on the x-axis and ___________ on the y-axis.
The demand curve gives the quantity demanded by the consumer at each ____________.
Which of the following statements is INCORRECT in the context of demand function?
Marginal Product is defined as:
