D) The factors influencing price elasticity of demand

The idea

The price elasticity of demand (PED) for a product is influenced by several key factors. The availability of close substitutes is the most significant determinant; goods with many substitutes (like specific brands of cereal) have highly elastic demand, whereas those with few (like tap water) are inelastic. The proportion of income spent on the good also matters; expensive items like cars tend to have more elastic demand than cheap items like matches. Additionally, whether a good is a necessity or a luxury affects its PED, with necessities being more inelastic. Finally, time is a crucial factor; demand tends to become more elastic over time as consumers find alternatives or adjust their habits.

What earns the marks

• Explain that a higher number of close substitutes makes demand more price elastic.
• Identify that goods taking up a large proportion of a consumer's income generally have more elastic demand.
• Distinguish between necessities, which have price inelastic demand, and luxuries, which have price elastic demand.
• Describe how demand becomes more price elastic over time as consumers have longer to find substitute products.
• Recognise that the degree of brand loyalty can reduce price elasticity, making demand more inelastic.

Common mistakes and how to put them right

• Stating that all expensive goods have inelastic demand.

  Put it right: Expensive goods take up a larger proportion of income, making their demand more price elastic, not inelastic.

• Confusing the short run and long run effects on elasticity.

  Put it right: Demand is typically more inelastic in the short run and becomes more elastic in the long run as consumers adjust their behaviour.

• Assuming that a broad category of goods has the same elasticity as a specific brand.

  Put it right: Broad categories (e.g. food) have fewer substitutes and are inelastic, while specific brands (e.g. a particular baked bean brand) have many substitutes and are elastic.

Exam tips

• When evaluating the PED of a product, always consider the availability of substitutes as your primary analytical point.
• Use concrete examples, such as petrol for a necessity with few short-term substitutes, to illustrate your arguments clearly.
• Remember to discuss how brand loyalty or advertising can manipulate these factors to make demand more inelastic.