Factors that help determine how elastic demand for a particular good is

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1. Proportion of Income Spent on the Good: If a good represents a large proportion of a consumer's income, a change in its price will have a more noticeable impact on their budget, making demand more elastic. Consumers will be more sensitive to price changes for expensive items. Conversely, if a good represents a tiny fraction of a consumer's income (like a box of matches or a single candy bar), a price change will have a negligible effect on their budget, and demand will be more inelastic.

Applying these factors to a sweater from Banana Republic:

• Availability of Close Substitutes: A sweater from Banana Republic would likely have highly elastic demand due to the abundance of close substitutes. Consumers can find sweaters of similar style, quality, and price point at numerous other retailers like Zara, H&M, Gap, Old Navy, Nordstrom Rack, or even department stores. If Banana Republic raises its sweater prices, consumers can easily switch to a competitor.
• Necessity vs. Luxury: A sweater, especially one from a fashion retailer like Banana Republic, is generally considered a luxury or at least a discretionary item, not a necessity. While clothing is a necessity, a specific brand-name sweater is not. Consumers can easily delay its purchase or choose a cheaper alternative if the price increases, contributing to more elastic demand.
• Proportion of Income Spent on the Good: For most consumers, a single sweater, even from Banana Republic, represents a relatively small proportion of their overall income. However, it's not as negligible as a small everyday item. If the price increase is significant, it might still influence purchasing decisions, contributing to a degree of elasticity. If it were a very expensive luxury item like a car or a house, this factor would lead to even greater elasticity. For a sweater, it contributes to elasticity, but less so than the availability of substitutes.

Considering these factors, the demand for a sweater from Banana Republic would likely be quite elastic due to the vast number of substitutes and its classification as a discretionary item rather than a necessity.

Justin Bieber Exercise Video Elasticity of Demand

To calculate the elasticity of demand, we use the midpoint method, which provides a more consistent result regardless of the direction of the price change.

Formula for Price Elasticity of Demand (Midpoint Method):Ed​=(P2​−P1​)/((P1​+P2​)/2)(Q2​−Q1​)/((Q1​+Q2​)/2)​

Where:Q1​=100,000 subscriptions Q2​=60,000 subscriptions P1​=$20P2​=$30

Step 1: Calculate the percentage change in quantity demanded((100,000+60,000)/260,000−100,000​)=(160,000/2−40,000​)=(80,000−40,000​)=−0.5

Step 2: Calculate the percentage change in price((20+30)/230−20​)=(50/210​)=(2510​)=0.4

Step 3: Calculate the elasticity of demandEd​=0.4−0.5​=−1.25

Sample Answer

Factors Determining Price Elasticity of Demand

The price elasticity of demand (PED) measures the responsiveness of the quantity demanded of a good to a change in its price. Three key factors help determine how elastic demand for a particular good is:

1. Availability of Close Substitutes: This is perhaps the most significant factor. If there are many close substitutes for a good, consumers can easily switch to an alternative when the price of the original good increases. This makes demand more elastic. Conversely, if there are few or no close substitutes, consumers have fewer alternatives, and demand tends to be more inelastic.
2. Necessity vs. Luxury: Goods considered necessities (like essential food items, basic utilities, or life-saving medication) tend to have more inelastic demand because consumers will typically purchase them regardless of price changes, as they are essential for survival or basic well-being. Luxury goods (like designer clothes, high-end electronics, or exotic vacations), on the other hand, often have more elastic demand. Consumers can easily forego or delay the purchase of luxuries if their prices rise.