Question : Which of the following factors affects the price elasticity of demand?

Option 1: Availability of substitutes

Option 2: Time period under consideration

Option 3: Proportion of income spent on the good

Option 4: All of the above

Correct Answer: All of the above

Solution : The correct answer is (d) All of the above

The factors that affect the price elasticity of demand include:

a) Availability of substitutes: The availability of close substitutes for a good influences its price elasticity of demand. When there are many substitutes available, consumers have more options to choose from, making their demand more elastic. On the other hand, if there are limited or no substitutes, the demand tends to be less elastic.

b) Time period under consideration: The time period considered when analyzing price elasticity of demand can also impact its value. In the short run, demand may be relatively inelastic because consumers may not have immediate alternatives to respond to price changes. However, in the long run, consumers have more time to adjust their behavior and find substitutes, making demand more elastic.

c) Proportion of income spent on the good: The proportion of income that consumers allocate to a particular good affects its price elasticity of demand. Goods that represent a significant portion of a consumer's income tend to have more elastic demand. Consumers are more sensitive to changes in the price of goods that consume a larger proportion of their budget.

Considering these factors is important in understanding and predicting the responsiveness of quantity demanded to changes in price, and ultimately in making informed business decisions.