How does the availability of close substitutes affect elasticity of demand for a product?
We know that, price elasticity of a good measures the responsiveness of quantity demanded to change in price. Higher elasticity implies that quantity demanded changes at a rate higher than change in price.
More the substitutes available, more elastic will be the demand. This is because, people have a wider choice of goods. Eg. people originally buying Soap A will shift to Soap B when price of Soap A rises. given that soap A and B are substitutes.
This can be seen in monopolistic and perfect competition.
On the other hand, lack of close substitutes makes the price elasticity of good inelastic.
Eg. Water, Railways
Hope this helps! Cheers!!
More the substitutes available, more elastic will be the demand. This is because, people have a wider choice of goods. Eg. people originally buying Soap A will shift to Soap B when price of Soap A rises. given that soap A and B are substitutes.
This can be seen in monopolistic and perfect competition.
On the other hand, lack of close substitutes makes the price elasticity of good inelastic.
Eg. Water, Railways
Hope this helps! Cheers!!