Economics – The allocation of resources - Price elasticity of demand (PED) | e-Consult

The availability of substitutes is a key determinant of price elasticity of demand. If many close substitutes are available, consumers are more likely to switch to a different product if the price of the original product increases. This makes demand more elastic – meaning a relatively small price change leads to a large change in quantity demanded. Conversely, if there are few or no close substitutes, consumers are less likely to change their purchasing behaviour, making demand more inelastic. A price increase will have a smaller impact on quantity demanded.

Example 1: Petrol. Petrol has relatively few close substitutes. Even if the price of petrol rises, people still need to travel, so demand remains relatively inelastic.

Example 2: Coffee. Coffee has many substitutes, such as tea, energy drinks, or hot chocolate. If the price of coffee increases, consumers can easily switch to one of these alternatives, making demand for coffee relatively elastic.