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Module 1: The competitive market system

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Elasticity of Demand

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XSIQ
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Economics - The Competitive Market System - Elasticity - Elasticity of
Demand

Elasticity of Demand

The following factors have great influence over the elasticity of demand
for a good or service.

* The number of substitutes. Products with a lot of substitutes are price
sensitive, meaning they have elastic demand, because consumers can easily
switch to the substitutes if the price of the product goes up. Products
with very few substitutes have inelastic demand.

* Necessity. Most consumers will accept a price rise if they believe the
product is a necessity. The demand is, therefore, very inelastic. Also,
products that are addictive have very inelastic demand.

* Relative cost. If the product is relatively cheap, like a newspaper,
its demand is quite inelastic, as most consumers would accept, for example,
a 10 per cent price increase. If, however, the product is expensive, like a
motor car, a 10 per cent increase in price is likely to have a significant
effect on the quantity demanded.

The demand in this case would be quite elastic.

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