Principles of Economics- Mankiw (5th) 91

Principles of Economics- Mankiw (5th) 91 - CHAPTER 5 E L A...

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CHAPTER 5 ELASTICITY AND ITS APPLICATION 95 little concern over his health, sailboats might be a necessity with inelastic demand and doctor visits a luxury with elastic demand. Availability of Close Substitutes Goods with close substitutes tend to have more elastic demand because it is easier for consumers to switch from that good to others. For example, butter and margarine are easily substitutable. A small increase in the price of butter, assuming the price of margarine is held fixed, causes the quantity of butter sold to fall by a large amount. By contrast, because eggs are a food without a close substitute, the demand for eggs is probably less elastic than the demand for butter. Definition of the Market The elasticity of demand in any market de- pends on how we draw the boundaries of the market. Narrowly defined markets tend to have more elastic demand than broadly defined markets, because it is easier to find close substitutes for narrowly defined goods. For example, food, a
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