Describe how the necessity of a good and the availability of substitutions impact price elasticity?


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The Necessity of a good and the availability of substitutions impact price elasticity. The definition of Price Elasticity is a measure of responsiveness of some other variable to a change in price (About.com 2009). The higher the price elasticity, the more responsive buyers are to price changes. High price elasticity implies that when the price of something goes up, buyers will buy less of it and when the price of it goes down, they will buy more. Low price elasticity is the opposite, changes in price have little influence on demand. When dealing with price elasticity, consider the changes in prices of substitute goods. When the change of a substitute good occurs, a change in the demand of original goods will be affected in the same direction. For instance, if the price of gelato goes up, gelato eaters will switch to ice-cream. If the price of the substitute good goes down, the gelato is now is now cheaper, consumers buy more gelato instead and the quantity of ice-cream demanded is cut. The price increase of a substitute good increases the quantity demanded of the original good and a decrease in the price of a substitute good causes a decrease in the quantity of original good demanded.

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