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IAI Actuarial Core Principles · Business Economics · Consumer demand and behaviour

Which of the following changes would be expected to make demand for a good MORE price inelastic?

Demand becomes more price inelastic when the good takes a very small share of income, such as salt, because consumers barely notice price changes. More substitutes, longer adjustment time, narrower definitions and larger budget shares all make demand more elastic.

  1. AA longer time period for consumers to adjust to a price rise
  2. BThe availability of many close substitutes
  3. CA narrower definition of the product, such as one brand of biscuits instead of all biscuits
  4. DA reduction in the share of income spent on the good, such as saltCorrect
  5. The good becoming a larger part of household budgets

Explanation

Goods that take a tiny share of income, like salt, are rarely worth economising on, so demand is less responsive to price. Longer time periods, more substitutes and narrower definitions all raise elasticity, and a larger budget share also makes demand more elastic.

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