A product is likely to have a price elasticity of demand greater than 1 when which condition holds?

• A. Its price falls.
• B. It is a necessity.
• C. It has close substitutes.
• D. The percentage of income spent on it decreases.

Answer: (C)

Price elasticity of demand measures how much quantity demanded responds to a price change. An elasticity greater than one means the quantity demanded changes by a larger percentage than the price does. Having close substitutes makes a product highly responsive: if the price rises, consumers can switch to an alternative easily, leading to a fairly large drop in quantity demanded. That larger response is what pushes the elasticity above one.

When a product is a necessity, there are fewer good substitutes, so people still need to buy it even if the price rises, which keeps the response smaller and elasticity below one. If a product takes up only a small share of income, price changes feel less significant to consumers, also reducing responsiveness and elasticity. And while a price drop can increase quantity demanded, the size of that increase depends on substitution options; the crucial factor for a high elasticity is the presence of close substitutes that enable easy switching. Therefore, the presence of close substitutes is the best indicator of a price elasticity of demand greater than one.