Determinants
Of Price Elasticity Of Demand
Price
elasticity of demand measures the change in demand in reaction to change in
price by keeping others factors remains unchanged. Demand of goods can be
termed as elastic if change in demand of goods is very high in reaction to
change to change in price. Inelastic demand of goods means very slight
change in demand of goods in reaction to change in price.
Determinants
are:
1)Types of
goods: Demand of luxury goods decreases with decrease in price and vice versa.
On the other hand demand for necessary goods have slight change with change in
price.
Example:
Blackberry was used as status symbols by corporate personnel and others
belonging to high income group. But due to the decision by Blackberry to introduce
low priced mobile sets and introduction of Apple changed the whole scenario for
Blackberry
2)Substitution effect : If any
good has any close substitute good than the price of substitute good has effect
on demand of that good. If substitute good is not good in terms of quality then
it has little effect on demand of main good.
Example: Coffee
and tea are perfectly interchangeable drinks therefore change in price of one
item can have effect on demand of other good.
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