Question

How is the elasticity of demand of a commodity affected by the existence of substitutes of a commodity? 

Answer 1

1. The most important factor influencing price elasticity of demand is the amount and type of substitutes available for a commodity. If a commodity has numerous near substitutes, its demand is likely to be elastic. Even a slight price drop will encourage more consumers to purchase this commodity rather than its substitutes.
2. For example, coffee and tea may be considered close options. When the price of coffee reduces in comparison to the price of tea, more people will purchase more coffee and less tea because coffee is now significantly cheaper. Similarly, if the price of Pepsi drops, a huge number of consumers will transfer from Coke to Pepsi, resulting in a significant increase in demand for Pepsi. Similarly, demand for Domino's pizza is highly elastic because there are numerous close substitutes, such as other pizza brands and fast food products. On the other hand, if a good has no or few replacements, demand for it will be inelastic.
3. Consumers will have to buy it whether the price is high or cheap. This is the case for milk, salt, and sugar, which have no viable substitutes. As a result, when the price of milk rises, the amount demanded does not decline dramatically, and when the price lowers, the quantity demanded does not rise significantly. In general, an item with a large number of similar alternatives has elastic demand, whereas one with a small number of inadequate substitutes has inelasticity.