How is the magnitude of price elasticity for an individual good determined? 1. By the degree to which the good is a necessity or luxury 2. By the extent to which substitutes are available 3. By the rate of income growth in the economy 4. By the relative importance of the good in the consumer's budget Select the correct answer using the code given below.

The magnitude of price elasticity of demand for an individual good is determined by several key factors. First, the nature of the good—whether it is a necessity or a luxury—is critical; necessities like food are price inelastic, while luxuries are highly elastic [1]. Second, the availability of close substitutes significantly impacts elasticity; if many substitutes exist, consumers can easily switch, making demand more elastic [1]. Third, the relative importance of the good in a consumer's budget, or the proportion of income spent on it, determines responsiveness; goods consuming a larger share of income tend to be more price elastic. While income levels influence overall demand, the 'rate of income growth in the economy' is a macroeconomic indicator rather than a direct determinant of the price elasticity magnitude for a specific individual good. Therefore, statements 1, 2, and 4 are correct.

Sources

1. [1] Microeconomics (NCERT class XII 2025 ed.) > Chapter 2: Theory of Consumer Behaviour > 2.6.2 Factors Determining Price Elasticity of Demand for a Good > p. 31