The greater the possibility of substitution the greater the price elasticity of

The greater the possibility of substitution the

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The greater the possibility of substitution, the greater the price elasticity of demand for it. If substitutes for a commodity are unavailable, people will have to buy it even when the price rises, and therefore the demand would tend to be inelastic. For instance, if the price of Cola were to sharply increase, many consumers would purchase other kinds of cold drinks, and as a result, the quantity demanded of Cola will decline. However, if the price of Cola decreases, consumers will change from other cold drinks to drinking Cola. Thus, the demand for Cola is elastic. It is the availability of close substitutes that makes the consumers sensitive to the changes in the price of Cola and this makes the demand for Cola elastic. Likewise, demand for common salt is inelastic, because substitutes for common salt are not available. However, if the price of common salt rises slightly, the people would
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consume almost the same quantity of salt as before since substitutes for salt are unavailable. The demand for common salt is inelastic, because people spend very small part of their income on salt. Thus, even if the price of salt rises, it makes negligible difference in their budget allocation for the salt. In case of VW substitutes are the following one, which you also have read already before: Public transportation o Train/ Bus Bike Car Sharing (car2go, zip car) The influence of the factor substitutes in the case of Volkswagen depends on the region where people live. This means in regions people where the infrastructure is well developed and good public transport possibilities are available the price tends to be more elastic. This means if VW increases the price for their cars the people will react very sensitive on this change and stop buying cars. Instead the consumers will start to use public transportations. In Vienna for example the train, tram or the underground railway. Volkswagen has to be very careful if they want to increase their prices in these regions. However, within rural areas, price of Volkswagen will not be that elastic, because substitutes are not available in the same quantity, compared to bigger cities. This means people in those regions are not so sensitive if Volkswagen increases the price because the number of substitutes is not very big and therefore the number of sales will stay quite the same. All in all, the number of substitutes and their effect on Volkswagen depends on the region, therefore an increase in the price has to be done carefully. 4.2 Time In general, the element of time also influences the elasticity of demand for a commodity. Demand tends to be more elastic if the time involved is long. This is because consumers can substitute goods in the long run. In the short run, substitution of one commodity by another is not so easy. The more time the consumers have, the greater is the ease with which both consumers and businessmen can substitute one commodity for another. For instance, if the price of fuel oil
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rises, it may be difficult to substitute fuel oil by other types of fuels such as coal or cooking gas.
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  • Winter '18
  • Renault, Volkswagen, Porsche, Volkswagen Group, Scania

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