What determines the price elasticity?
• The ease with which consumers can substitute another good. • EXAMPLE: • consumers can readily substitute one brand of detergent for another if the price rises • so we expect demand to be elastic • but if all detergent prices rise, the consumer cannot switch • so we expect demand to be inelastic Elasticity is higher in the long run • In the short run, consumers may not be able (or ready) to adjust their pattern of expenditure. • If price changes persist, consumers are more likely to adjust. • Demand thus tends to be • more elastic in the long run • but relatively inelastic in the short run. Elasticity and revenue When price is changed, the impact on a firms total revenue (TR) will depend upon the price elasticity of demand.
