Pick two products and explain which one will have a greater price elasticity of demand and why this will be the case.  

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pohnpei397 eNotes educator| Certified Educator

Let us look at the price elasticity of demand for vacations in general and for vacations in Hawaii in particular.  If the price of both go up by the same percentage, it is likely that the quantity demanded of vacations to Hawaii will go down more than for vacations in general.  In other words, the vacations in Hawaii have a greater price elasticity of demand.

The reason for this is that one of the determinants of price elasticity is the number of substitutes that are available.  If the price of one product goes up and you can just buy a different product, you will do so.  This is the case with vacations to Hawaii.

There are many other places that you can go for vacation other than Hawaii.  There are even many other places with nice beaches, rainforests, warm weather, etc.  So if the price of a vacation in Hawaii goes up, a person might go to a resort in Mexico instead.  By contrast, there is no substitute for vacations in general.  Therefore, if the price of all vacations go up, the quantity demanded will not go down as much because people have no other choice (other than to simply not have a vacation).