If a product has many close substitutes, its price elasticity of demand tends to be

• A. smaller.
• B. larger.
• C. about unity.
• D. zero.

Answer: (B)

Price elasticity of demand measures how much quantity demanded responds to a price change. When there are many close substitutes available, consumers can switch easily to alternative products if the price of one rises, so a small price increase leads to a relatively large drop in the quantity demanded of that product. That makes the demand more responsive, i.e., larger in absolute value. For example, if one brand of a common product raises its price, shoppers can choose other brands with little hassle, causing a substantial decrease in the quantity demanded for the higher-priced brand. If substitutes were scarce, the same price rise would push fewer buyers to switch, and demand would be more inelastic (smaller elasticity). Remember the usual negative relationship between price and quantity demanded, but we focus on the magnitude here, which is larger with many close substitutes.