What Determines Elasticity of Demand?
Elasticity of demand is mostly determined by the availability of substitutes,
the importance in consumers’ budgets, and the time period under
consideration.
Availability of Substitutes
Some products, such as margarine, broccoli, Dell PCs, and Toyota cars,
have quite close substitutes—butter, other green vegetables, Asus PCs,
and Mazda cars. A change in the price of these products, with the prices of
the substitutes remaining constant, can be expected to cause much
substitution. A fall in the price of broccoli leads consumers to buy more
broccoli and less of other green vegetables, and a rise in price leads
consumers to buy less broccoli as they substitute toward other green
vegetables.
A related point concerns product definition. Products defined more
broadly, such as all foods or all clothing or all methods of transportation,
have many fewer satisfactory substitutes than do products defined much
more narrowly. A rise in their prices can be expected to cause a smaller
fall in quantities demanded than would be the case if close substitutes
were available. For example, there are far more substitutes for Diet Pepsi
than there are for the broader categories of diet colas, soft drinks, or all