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What determines the elasticity of demand?

Price elasticity of demand is the responsiveness of demand to a change in price. (Definitions are key in economics!)

1. The number and closeness of substitutes, if a good has many close (similar) substitutes, it will be very price elastic. This is because if the price were to increase for one good e.g. Coke, most people will switch to Pepsi, a close substitute. Or if the price of Coke fell, Pepsi drinkers would change to Coke, showing demand is elastic and will change.

2. Proportion of income spent on the good. The larger the proportion of income spent on the good, the more price elastic it is. For example, if you're buying a new car, which takes up a high proportion of income, demand will be responsive to a change in price. You will be more likely to buy it if the price fell.

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