The demand for a product tends to be price inelastic if:
A) few good substitutes for the product are available.
B) few good complements for the product are available.
C) people spend a large share of their income on the product.
D) the population in the market area is large.
Not getting the answer according to the readings. Any ideas?作者: giorgio10 时间: 2013-4-8 15:52
A, if there are not any good substitutes for a product, customers don’t have other options to purchase a comparable product so price changes wouldn’t affect demand much. For example oil.作者: Benjiko 时间: 2013-4-8 15:52
How can the demand be inelastic if there are a few good substitutes available?
Oil has an inelastic demand because it does NOT have ‘a few good subsitutes available’作者: brain_wash_your 时间: 2013-4-8 15:53
A is correct
Say for example apples. If the price of apples rises sharply people can substitute apples for oranges so they will change the quantity demanded for apples, more than the change in price.
Remember that inelastic elasticity means that people will not change the quantity as much as the price change.
For oil, if the price of oil rises people won’t be able to substitute it a lot, maybe some will take the bus, maybe some the cab, but there are a few substitutes, and the quantity demanded for oil will not change so much. If there were fewer substitutes for oil, the elasticity would be “more” inelastic.
Hope that makes the idea.
Alex.作者: LPoulin133 时间: 2013-4-8 15:53
it doesn’t say ‘?“A” few good substitutes’, it says “few good substitutes”, meaning that there are not good substitutes available作者: MiniMe7 时间: 2013-4-8 15:53
You are thinking of the ‘few’ in the wrong sense, TheTrader. The way in which you wrote the possible answer choices, it is saying that there are only a few good substitutes, rather than many or several good substitutes. If there are not many substitutes available, demand is relatively inelastic.作者: stockjaguar 时间: 2013-4-8 15:54
A) few good substitutes for the product are available.
What is says is that only a few are good substitutes. That is what I understand from it. And it also says that the demand tends to be inelastic. Since for oil a “few good substitutes for the product are available” the demand tends to be inelastic.
Best,
Alex.作者: waldziuchna 时间: 2013-4-8 15:55
CFA likes to use the words “few” and “many” in the exam.
With oil, there are a “few” good subsitiutes available even though they are not readily available to the mass public, natural gas for example. If there are NO good substitutes available, it would be perfectly inelastic because people have NO choice. If there are FEW good substitutes available, people have limited choices so many will have to stay with the product while demand may go down some with higher prices. This is the definition of inelastic.
