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Which of cars or Toyotas is likely to have the greatest elasticity of demand? Why?

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yaga49

Posted April 25, 2013 at 2:56 PM via web

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Which of cars or Toyotas is likely to have the greatest elasticity of demand? Why?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted April 25, 2013 at 3:12 PM (Answer #1)

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Price elasticity of demand has to do with how much consumer behavior changes when the price of a good or service changes.  In general, if the price of a product goes up, fewer people will want to buy it.  But that is not always equally true.  Sometimes, the price of a product will go up and many fewer people will buy it.  In that case, we say that the demand for that product is relatively elastic.  By contrast, if the price goes up and only a few people stop buying a product, we say that its demand is relatively inelastic.

One of the major determinants of elasticity is the availability of substitutes.  If the price of Good X goes up and you think Good Y is an adequate substitute, you simply buy Good Y.  But if there is no real substitute for Good X, you are more likely to continue to buy it.  Therefore, we can say that goods with more substitutes are more likely to have elastic demand while those with few or no substitutes have inelastic demand.

The demand for cars will be less elastic than for Toyotas because there are fewer substitutes for cars.  If the price of Toyotas goes up, people can buy Fords or Hondas or a number of other kinds of cars.  If the price of cars goes up, there is not a really good substitute.  Therefore, demand for Toyotas will be more elastic than demand for cars in general.

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