Determinants of elasticity example | APⓇ Microeconomics | Khan Academy

We are asked which of the following describes a good that is likely to have the most elastic demand. Choose one answer. So pause this video and see if you can answer that.

All right, so the first choice right over here, they talk about a luxury with many substitutes. We already talked about when we're dealing with substitutes. If there's a lot of substitutes, that makes the quantity demanded very sensitive to price. So this would make it more elastic. To have many substitutes is more elastic, and then the fact that it's a luxury—it's not something that people need—this would also make quantity more sensitive to price generally. So we would also say more elastic.

So this is looking like a good candidate, but let's check the other options here.

A necessity with few substitutes? Well, this is the opposite. If it's a necessity, this would be more inelastic or less elastic. Less elastic. If you have a change in price for that thing, people say, "Well, I still have to buy that thing; I can't substitute it with other things." This would also be less elastic. And remember, we're looking for the most elastic demand, so we can rule this one out.

A broadly defined good such as food? Well, we just talked about that. If we're talking about food and there's a price change in food, well, we need food. So our quantity demanded would not likely change, or a percent change in quantity would not likely be that much. This would be fairly inelastic. Rule that one out.

Goods that make up a small share of the budget? Well, this goes back to the example with bubble gum. If bubble gum goes from 25 cents to 30 cents, we might not care so much versus if a car goes from 25,000 to 30 thousand dollars. So the small things that we might not care about price changes so much, if we don't care so much about price changes, that would imply less elasticity. So that definitely would not be the most elastic demand.

Goods that have to be bought under a short time constraint? Well, a good example is that it's raining and people need umbrellas right now—in the next five or ten minutes—and they might not necessarily be so sensitive to price. So this is going to be less elastic, and so once again we would rule this out. If we had a long time frame, well then people might be able to shop around for substitutes and then things might get a little bit more elastic; they would be more sensitive to price.

So we definitely like in this scenario choice A.