CAPF AC 2021 Q32: Indian Economy – Microeconomics & Market Concepts
- (a) 1, 2 and 3
- (b) 1 and 4 only
- (c) 1, 2 and 4
- (d) 3 and 4
Answer: (c) 1, 2 and 4
Explanation
What decides the price elasticity of a good
How to think: price elasticity asks how strongly buyers of one good react when its price changes.
So the factors must be about that good and its buyer.
The growth rate of the whole economy is not about one good.
| Factor | Effect on elasticity | In the list? |
|---|---|---|
| Necessity or luxury | Necessities are inelastic, luxuries elastic | 1, yes |
| Availability of substitutes | More substitutes, more elastic | 2, yes |
| Share in the consumer's budget | Bigger share, more elastic | 4, yes |
| Time period | Demand is more elastic in the long run | Not listed |
| Rate of income growth in the economy | Not a determinant of price elasticity | 3, no |
So the correct factors are 1, 2 and 4.
Answer: (c) 1, 2 and 4.
Why each option is right or wrong
- (a) Incorrect. It includes 3; income growth of the economy does not decide price elasticity.
- (b) Incorrect. It leaves out 2; substitutes are the most important factor.
- (c) CORRECT. Nature of the good, substitutes and budget share decide price elasticity.
- (d) Incorrect. It includes 3 and leaves out both 1 and 2.
Key point
Determinants of price elasticity of demand: nature of the good (necessity or luxury), availability of close substitutes, share of the good in the consumer's budget, and the time period.
Remember
Elasticity depends on need, substitutes and budget share.
Common mistakes
- Mixing up price elasticity with income elasticity and accepting statement 3.
- Dropping substitutes, which textbooks list as the first determinant.
- Thinking a cheap item like salt is elastic; a tiny budget share makes it inelastic.
Exam tip
Educated guess: statement 3 talks about the whole economy, while the question is about an individual good. Remove every option with 3 and only (b) and (c) remain; substitutes clearly matter, so (c).
Sources
- NCERT Class XII Economics — Introductory Microeconomics (theory of consumer behaviour, elasticity of demand)
- Samuelson and Nordhaus, Economics — Applications of Supply and Demand (determinants of price elasticity)