What factors affect price elasticity in a competitive market?

Price elasticity in a competitive market is affected by factors such as availability of substitutes, necessity of the product, time period, and consumer income.

The availability of substitutes is a significant factor that affects price elasticity. If a product has many substitutes available in the market, it is likely to have high price elasticity. This is because consumers can easily switch to a different product if the price of the original product increases. For example, if the price of a particular brand of coffee increases, consumers can easily switch to another brand, making the demand for the original brand highly elastic.

The necessity of the product also plays a crucial role in determining price elasticity. Products that are considered necessities, such as food and medicine, tend to have inelastic demand. This means that even if the price increases, the quantity demanded does not change significantly as consumers still need these products. On the other hand, luxury goods or non-essential items tend to have elastic demand. If the price of a luxury item increases, consumers may choose not to buy it, leading to a significant decrease in quantity demanded.

The time period is another factor that can affect price elasticity. In the short run, consumers may not have enough time to adjust their consumption habits in response to a price change, making the demand inelastic. However, in the long run, consumers have more time to find substitutes or change their consumption habits, making the demand more elastic. For example, if the price of petrol increases, consumers may not be able to reduce their usage immediately due to the lack of immediate alternatives. However, in the long run, they may choose to use public transport or buy more fuel-efficient cars, making the demand for petrol more elastic.

Lastly, consumer income can also influence price elasticity. If consumers have a high income, they may not be as sensitive to price changes, making the demand inelastic. However, if consumers have a lower income, they are likely to be more sensitive to price changes, making the demand more elastic. For instance, a high-income consumer may not change their consumption of a product significantly if its price increases, while a low-income consumer may choose to buy less or switch to a cheaper alternative.

In conclusion, the factors that affect price elasticity in a competitive market are the availability of substitutes, the necessity of the product, the time period, and consumer income. Understanding these factors can help businesses make informed decisions about pricing strategies and anticipate how changes in price might affect demand for their products.