Wize AP Microeconomics Textbook > Elasticity

Factors that Affect Elasticity

Popular Courses

AP Exam Prep

0:00 / 0:00

 Factors That Affect Elasticity of Demand
There are 5 main factors that could affect the elasticity of demand.
1. Number of Substitutes
Many substitutes → (elastic)
    
Few substitutes → (inelastic)
                                                                                                         
Examples
If a product has many substitutes (like Coke, Pepsi, Sprite, Mountain Dew) and its price rises, you can easily switch to the competitor so you will be more sensitive to the price (elastic). 
If a product only has a few substitutes (like certain types of medicine) you will be insensitive to the price (inelastic).


PAGE BREAK
2. Type of Product
Luxury product → (elastic)
 
Necessity product → (inelastic)
                                            
Examples
If the price of a luxury good (like designer watches) increases, you don't need the product so you will be more sensitive to the price (elastic). 
If the price of something you need (like water) increases, you will be insensitive to the price (inelastic), ceteris paribus (holding everything else constant).

Exam Tip
Ceteris paribus is a just a Latin term that means "everything else held constant" and if you see it in a question you can ignore it! The term should have no effect on your answer.


PAGE BREAK
3. How the product is defined
Narrowly defined → (elastic)
 
Broadly defined → (inelastic)
                                                   
Examples
If the price of a narrowly defined product (like pizza) increases, you can switch to other products (like burgers, hot dogs, chicken wings) so your demand will be elastic. 
If the price of a broadly defined product (like food in general) increases, then you don't have any other options because you need food to live so your demand will be inelastic.


PAGE BREAK
4. Short or Long Run
Short run → (inelastic)
 
Long run → (elastic)
                                                                                                      

Examples
If the price of gas rises tomorrow (short run), those people that drive to work will have to pay the higher price (inelastic). 
If the price of gas keeps rising for the next 3 years (long run) then you can switch to a hybrid car, bicycle, or use more public transportation (elastic).  

PAGE BREAK
5. Price as a % of Your Income
Small % of your income → (inelastic)
 
Large % of your income → (elastic)
                                                                                              
Examples
If the price of newspapers doubles from $0.50 to $1 it still represents a very small percentage of your income so you will probably still buy the newspaper (inelastic). 
If the price of a car doubles (large percentage of your income) then you will be much more sensitive to the price (elastic)

0:00 / 0:00

Example: Factors That Affect Elasticity
The price elasticity of demand for Toyota is ____________ than the elasticity of cars in general. 

A) less
 
B) greater 
C) equal or less
D) less or greater

B. Toyota is narrowly defined so demand will be elastic (if the price goes up you can switch to Nissan, Subaru, Tesla). But cars in general are broadly defined so demand will be inelastic (if the price of all cars go up, then you don't have many other options).

Practice: Factors That Affect Elasticity
Which of the following statements do you think are correct about the demand elasticities for Fruit Loops and food?

Because Fruit Loops are food, but not all food is Fruit Loops, Fruit Loops would have a lower price elasticity of demand

Food has a lower price elasticity of demand because it is more broadly defined.

Because Fruit Loops are food, Fruit Loops would have the same price elasticity of demand as food.

Food has a higher price elasticity of demand because it is a necessity.

Compared with food, Fruit Loops have a lower price elasticity of demand because it is specifically defined.

I don't know