Need clarification on the factors affecting price measures.

CFA Level I
#1

The factors are

  1. The larger the proportion of income spent on the good, the more elastic it is.

  2. Time or that long-run demand is more elastic than short-run demand.

For number 1, this is my understanding…

Breakdown:

  • the greater the cost of the good used relative to other goods

  • more elastic (then you change your demand for that good much more easily when there is a change in price)

The example which is making it confusing for me:

When housing costs increase, however, a consumer will be much more likely to adjust consumption, because rent is a fairly large proportion of income.

my comment: housing cost/rent is a large proportion of income, therefore, my demand for it would more likely change( so I will go look for cheaper places to live) than my demand for my consumption (fairly small proportion of income)

so which part did I mistunderstand?

For number 2, please explain

#2

Hello,

For the factor 1:

For demand eslasticity you must view other variables too, not only price and quantity demanded. For the house example and grabbing the definition of “The larger the proportion of income spent on the good, the more elastic it is” , the demand for houses would be elastic, but what about the house supply? or the subjective value of the house for the tenant?. When you rent a house you check this variables too, and they have effect on the rent I’m willing to pay. Is it near to work? is it nice and modern? bla bla. So in this case we need to know what var% of the price would make us to change the house.

This eslasticity definition would fit more for food, transport, clothes… For example, if you like to eat on restaurants and spend 20% of your income, what happen if the price goes 30% higher, you just change the restaurants or eat less because this price change hurts other goods comsumption.

For the Factor 2:

Long-run demand is more elastic than short-run demand because the comsuption preferences or needs are adjusted over time in a macro way. This effect is seen in the long-run, not in the short-run

#3

You also need to consider how difficult it is to change your consumption.

Changing where you shop for groceries, or what brand of toothpaste you buy, or where you buy petrol is relatively easy. Changing what car you own or where you live is considerably more difficult.

#4

I need to reread this over and over again… I may have missd something, because I still don’t get it haha