The most important influence on the elasticity of demand is the availability of substitutes for the product -- the more and better substitutes readily available, the greater the elasticity. We can apply this idea to understand a fundamental point about competitive industries. Why will farmers (for example) cut their prices when the result is that the sales revenue for the farm industry drops? The answer is that the individual firm faces a different demand curve, with a different elasticity, than the industry as a whole.
How will the individual firm's demand curve differ from the industry's demand curve? The elasticity of demand will be greater for the individual firm than for the entire industry. Here's why:
The products of other firms in the industry are close substitutes for the product of any one particular firm. Each firm faces many, close substitutes -- making for highly elastic demand. However, for the industry as a whole, the substitute products are not so close or numerous, so the elasticity is lower.
Taking potato farming as the example, the substitutes for the potato industry as a whole are rice, wheat, bread, pasta, and such as that -- not very good substitutes for a spud. But for Farmer Green's potatoes, the substitutes include farmer Brown's potatoes, and potatoes from farmers Black, White, Blue, ... and Jones, as well as rice and pasta and bread and wheat. Many more and better substitutes for Farmer Green's potatoes -- so Farmer Brown's demand curve is more elastic than the demand curve for all potato farmers.
But this is an important point in itself, as we will see later on.
