Which item has more elastic demand? A) Bottled Water B) Tap Water
Of these two, bottled water has the more elastic demand.
There are two reasons for this. First, products tend to have elastic demand if there is a substitute for them that is lower in price. If the price of bottled water goes up, more people can turn to tap water. If the price of tap water goes up (unless it goes up a tremendous amount), there is still no cheaper alternative. Second, products tend to have elastic demand if they are more expensive. Bottled water is much more expensive than tap water. If the price of tap water goes up, people hardly notice and do not think about drinking something else. If the price of bottled water goes up, it is much more noticeable and people start thinking about substitutes. For these two reasons, the demand for bottled water is much more price elastic than the demand for tap water.