Question

Price elasticity of demand is dependent upon:
(I) Availability of substitutes
(II) Share in total expenditure of households income
(III) Possibility of postponing the consumption
Select the correct answer from the options given below -

• A. (I) & (II)
• B. (II) & (III)
• C. (I) & (III)
• D. (I), (II) & (III)

Answer 1

The correct option is D (I), (II) & (III)

solution:

$I$ Demand for a commodity with large number of substitutes will be more elastic. The reason is that even a small rise in its prices will induce the buyers to go for its substitutes. For example, a rise in the price of Pepsi encourages buyers to buy Coke and vice-versa.

$II$ The potential for demandled growth can be ascertained by analysing the expenditure elasticities estimated for the tradable/non-tradable categories of goods and services. goods are highly expenditure elastic indicating that an increase in household income will result in a proportionally greater increase in expenditure

$III$ Possibility of the Postponement of Consumption: When the consumption of a commodity can be postponed (e.g., hair-dressing oil or perfumes), an increase in the price would cause a sharp fall in its demand. So, here the demand becomes elastic.

Hence the correct opt: D