Question

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

• A. (I) & (II)
• B. (II) & (III)
• C. (I) & (III)
• D. All of above are correct

Answer 1

The correct option is D All of above are correct

$\left(I\right)$ Availability of substitutes $:$ In general, the more good substitutes there are, the more elastic the demand will be.

$\left(II\right)$ Share in total expenditure of household's income $:$ The percentage of consumer’s income spent on a product also affects its price elasticity of demand. The larger the percentage of consumer’s income spent on a product the more elastic will be its de­mand. This explains why the demand for housing is more elastic than the demand for bread.

$\left(III\right)$ Possibility of postponing the 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.The consumption of food articles cannot be post­poned and accordingly the demand for these becomes relatively inelastic.

$\therefore$ Price elasticity of demand is dependent upon Availability of substitutes, Share in total expenditure of household's income and Possibility of postponing the consumption