Paper 3 · price elasticity of demand
Which of the following factors makes the demand for a good more price elastic (more responsive to a change in price)?
AThe good being a necessity that consumers must keep buying regardless of price changes, since there are few or no other goods that can satisfyingly replace it.
BThe good taking up only a very small proportion of a consumer's total income.
CConsumers having formed a strong habit of buying the good over a long period.
DThe availability of close substitutes that consumers can switch to if the price of the good rises.
Explanation: When close substitutes exist, a price rise pushes consumers toward the alternative, so quantity demanded falls sharply, making demand elastic. Necessities, goods that take up a tiny share of income, and habitual purchases all tend to make demand less responsive to price, so they push demand toward being inelastic, not elastic.
Derived from ZIMSEC Economics Paper 3, June 2007, Q2
