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IAI Actuarial Core Principles · Business Economics · How competitive markets operate

Which of the following would, other things equal, make the demand for a good MORE price elastic?

Demand becomes more price elastic when consumers have a longer time to adjust. Over time they can find substitutes and change habits. Necessities, low budget shares, broad market definitions and habitual purchases all tend to make demand less responsive to price.

  1. AThe good is a necessity with no close substitutes
  2. BThe good takes a very small share of consumers' incomes
  3. CConsumers have a long time to adjust their behaviour after a price changeCorrect
  4. DThe market is defined very broadly, such as 'all food'
  5. The good is habit-forming and purchased regularly

Explanation

Over a longer time period consumers can find substitutes and change habits, so demand becomes more elastic. Necessities, small budget shares, broad market definitions and habit-forming goods all tend to make demand less elastic.

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