Chapter S Elasticity Ano Its Application

Definition of the Market The elasticity of demand in any market depends on how we draw the boundaries of the market. Narrowly defined markets tend to have more clastic demand than broadly defined markets because it is easier to find dose substitute for narrowly defined goods. Ix>r example, food, a bro;*d category-, has a fairly inelastic demand because there are no good substitutes for food. Ice cream, a narrower category, lias a more elastic demand because it is easy to substitute other desserts for kc cream. Vanilla icc cream, a very narrow category, has a very elastic demand because other flavors of ice cream are almost perfect substitutes for vanilla.

Time Horizon Coods tend to have more elastic demand over longer time horizons. When the price of gasoline rises, the quantity of gasoline demanded falls only slightly in the first few mouths. Over time, however, people buy more fuei-effu ient ears, switch to public transportation, and move closer to where they work. Within several years, the quantity of gasoline demanded falls more substantially.

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