Correct Option: B. the demand curve is fairly elastic
Detailed Explanation:
- Understanding Elasticity of Demand:
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Elasticity of demand measures how much the quantity demanded of a good responds to a change in price. If demand is elastic, a small change in price leads to a large change in quantity demanded. Conversely, if demand is inelastic, quantity demanded changes very little with price changes.
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Substitutes and Demand Elasticity:
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When a commodity has many substitutes, consumers can easily switch to another product if the price of the original commodity rises. This means that if the price of the commodity increases, consumers will likely buy less of it and more of its substitutes. Therefore, the demand for that commodity is sensitive to price changes, indicating that it is elastic.
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Graphical Representation:
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In a typical demand curve graph, the x-axis represents quantity demanded, and the y-axis represents price. An elastic demand curve is relatively flatter, indicating that a small increase in price leads to a significant decrease in quantity demanded. In contrast, an inelastic demand curve is steeper, showing that quantity demanded does not change much with price changes.
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Real-World Examples:
- Consider a product like butter. If the price of butter increases, consumers can easily switch to margarine or other spreads. This high availability of substitutes makes the demand for butter elastic. If butter had no substitutes, consumers would have to continue buying it even if the price increased, making the demand inelastic.
Why Other Options Are Incorrect:
- Option A: the demand curve is fairly inelastic:
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This option is incorrect because inelastic demand implies that consumers are not very responsive to price changes. If there are many substitutes available, consumers will be more responsive to price changes, making the demand elastic, not inelastic.
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Option C: the demand curve is parallel to the quantity axis:
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A demand curve that is parallel to the quantity axis would imply that the quantity demanded remains constant regardless of price changes, which is not realistic for a commodity with many substitutes. This scenario would indicate perfectly inelastic demand, which contradicts the premise of having many substitutes.
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Option D: the demand curve is positively sloped:
- A positively sloped demand curve suggests that as the price increases, the quantity demanded also increases, which is contrary to the law of demand. This situation typically occurs in the case of Giffen goods or Veblen goods, not for commodities with many substitutes.
Summary of Key Points:
- Elastic Demand: Demand is elastic when there are many substitutes available.
- Consumer Behavior: Consumers will switch to substitutes if the price of a commodity rises, indicating sensitivity to price changes.
- Graph Characteristics: Elastic demand curves are flatter, while inelastic curves are steeper.
- Real-World Application: Examples like butter and margarine illustrate how substitutes affect demand elasticity.
This understanding of demand elasticity is crucial for analyzing market behavior and making informed economic decisions.