beverages. As a result, the demand elasticity for Diet Pepsi is significantly
higher than for beverages overall.
Products with close substitutes tend to have elastic demands; products with no close
substitutes tend to have inelastic demands. Narrowly defined products have more elastic
demands than do more broadly defined products.Importance of the Product in Consumers’
Budgets
Some products represent only a very small fraction of consumers’
monthly budgets and even a large price change may lead to only a small
change in quantity demanded. For example, even a 50 percent increase in
the price of salt may lead to virtually no change in quantity demanded
because the increase in expenditure amounts to only a tiny fraction of
overall monthly expenditures.
In contrast, a similar price change for larger items—such as a car or
monthly rent or a home appliance—will have a much larger impact on
overall expenditures and thus will likely lead consumers to significantly
adjust their quantity demanded. The general result is higher price
elasticity for more expensive items.
Other things being equal, demand for items that represent a small fraction of consumers’
budgets tend to be less elastic than the demand for items that represent a larger fraction of
consumers’ budgets.Short Run and Long Run