Description
How does the number of substitutes affect the price elasticity of demand for a product or resource?
What does a higher number of substitutes mean for the slope of the demand curve?
What does a smaller number of substitutes mean for the slope of the demand curve?
Explanation & Answer
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1. How does the number of substitutes affect the price elasticity of demand for a product or resource?
The ease with which buyers can find substitutes-in-consumption affects the price elasticity of demand. The general rule is that goods with a greater availability of substitutes is more sensitive to price changes. With more substitutes available, buyers can easily respond to price changes.
2. The more and closer the substitutes available, the higher the elasticity is likely to be, as people can easily switch from one good to another if an even minor price change is made; There is a strong substitution effect. If no close substitutes are available, the substitution effect will be small and the demand inelastic
3. On the other side of the market is the price elasticity of supply. This is the relative response of quantity supplied to changes in the price. It is also analogously specified as the percentage change in quantity supplied to a percentage change in price.
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