Consider the following scenario:
Peter lives 25 kilometres from his work and owns a small car powered by petrol, which he uses to travel to work. There is no public transport in the area in which he lives.
If the price of petrol increases by 10% on Wednesday, will Peter be able to decrease his quantity of petrol by making use of a substitute?
Unfortunately for Peter, there is no substitute for petrol and he cannot make use of public transport because there is none where he lives. He will therefore not be able to decrease his quantity of petrol demanded by much. His demand for petrol is price inelastic, owing to the absence of substitutes. This absence or non-availability of substitutes is therefore an important determinant of the price elasticity of petrol for Peter.
However, bear in mind that the more substitutes there are, the more choices you have and the greater the price elasticity of the good or service will be.
Take the example of a restaurant meal where there is a number of substitutes available, such as a home-cooked meal, a take-away, and a pre-cooked meal from Shoprite or Woolworths. If the price of a restaurant meal increases, you can always switch to one of the substitutes.
As you use more of a substitute, the quantity demanded of the other good decreases.
As a general rule, we can state the following:
