Which factor tends to make demand for a particular product more price elastic?
Correct Answer
C) Many close substitutes are available
The availability of close substitutes increases price elasticity, because buyers can switch when the price rises. Necessities and items that take a small share of income tend to be less elastic.
Why This Is the Correct Answer
Option C is correct because the availability of many close substitutes makes demand more price elastic. When the price rises, buyers can look for substitutes to avoid paying the higher price, so the quantity demanded responds more strongly.
Why the Other Options Are Wrong
Option A: The product is a necessity for most buyers
Option A is wrong because a product that is a necessity for most buyers tends to have less elastic demand. Buyers keep purchasing necessities even when prices rise.
Option B: The product takes a very small share of income
Option B is wrong because a product that takes a very small share of income tends to have less elastic demand. A price change on such an item has little effect on buyers' budgets, so they respond less.
Option D: The product category has few alternatives
Option D is wrong because a product category with few alternatives tends to be more inelastic. With few substitutes, buyers have little choice but to keep buying when price rises.
Substitutes make buyers switch
If buyers can switch easily, they will when price rises, so many substitutes mean more elastic demand.
How to use: Use this to pick the factor that increases elasticity among necessity, budget share and substitute options.
Exam Tip
Sort the options: necessity, small budget share and few alternatives all point to inelastic demand, while many substitutes points to elastic demand.
Common Mistakes to Avoid
- -Thinking necessities have elastic demand
- -Believing few alternatives make demand more elastic
- -Assuming small budget items are highly price sensitive
Concept Deep Dive
Analysis
This question tests the determinants of price elasticity of demand. Demand is more elastic when buyers can easily switch to alternatives if the price rises, so the availability of close substitutes is the key factor.
Background Knowledge
Price elasticity of demand measures how much quantity demanded responds to a change in price. Demand tends to be more elastic when close substitutes are available and less elastic for necessities, items with few alternatives, and items that take a small share of income. In real estate, many comparable competing properties tend to make buyers more sensitive to price.
Real-World Application
In a subdivision with many similar homes for sale, an overpriced listing sits while buyers choose comparable alternatives. The appraiser recognizes that abundant substitutes make buyers price-sensitive and gives weight to the most similar competing sales.
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