Economics – Price elasticity, income elasticity and cross elasticity of demand | e-Consult

Explanation: The variation in price elasticity of demand along a straight-line demand curve is primarily driven by changes in consumer behaviour related to income and the availability of substitutes.

Low Price Points (Elastic Demand): At lower prices, consumers are more sensitive to price changes. This is because the product represents a smaller proportion of their overall income. A small price increase has a relatively large impact on their budget, leading them to switch to alternatives. Furthermore, at lower price points, there are often more readily available substitutes. Consumers can easily switch to a different product if the price increases, resulting in a significant decrease in quantity demanded. Therefore, the demand is elastic.

Higher Price Points (Inelastic Demand): As the price increases, the product becomes a larger proportion of the consumer's income. This makes consumers less responsive to price changes. Even if the price increases, the impact on their budget is smaller. Additionally, at higher price points, there are often fewer readily available substitutes. Consumers may feel they have no alternative but to continue purchasing the product, even if the price rises. Consequently, the demand is inelastic.

In summary: The relationship between price elasticity of demand and income/substitutes explains the shape of the demand curve. Lower prices and more substitutes lead to elastic demand, while higher prices and fewer substitutes lead to inelastic demand.