How does the existence of substitutes for a product affect the product's price elasticity of demand?

• A. It has no effect on the price elasticity of demand.
• B. It decreases the price elasticity of demand, making demand less sensitive to price changes.
• C. It increases the price elasticity of demand, making demand more sensitive to price changes.
• D. It makes the demand perfectly inelastic.

Answer: (C)

Verified step by step guidance

1. Understand the concept of price elasticity of demand, which measures how much the quantity demanded of a product changes in response to a change in its price. It is calculated as \(\text{Price Elasticity of Demand} = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}}\).
2. Recognize that substitutes are alternative products that consumers can switch to if the price of the original product rises. The availability of close substitutes means consumers have more options.
3. Analyze how the presence of substitutes affects consumer behavior: if the price of the product increases, consumers can easily switch to a substitute, causing a larger decrease in quantity demanded for the original product.
4. Conclude that because consumers are more responsive to price changes when substitutes exist, the price elasticity of demand becomes higher (more elastic), meaning demand is more sensitive to price changes.
5. Therefore, the existence of substitutes increases the price elasticity of demand, making the demand curve flatter and more responsive to price variations.