DETERMINANTS / FACTORS AFFECTING
PRICE ELASTICITY OF DEMAND
The elasticity of
demand is different for different goods. The various factors which affect the
elasticity of demand of a commodity are:
1.
Availability of Substitutes
The demand for a
commodity with more substitutes will be more elastic. For example, coffee and
tea may be considered as close substitutes, a rise in price of coffee
encourages buyers to buy tea and vice-versa. Thus, availability of close
substitutes makes the demand sensitive to change in the prices.
On the other hand,
commodities with few or no substitutes like salt, milk, sugar, etc., the demand
for it would be inelastic.
2.
Nature of the Commodity
The demand for
necessities like food items, medicines, etc. its demand is generally inelastic
as it is essential for existence and the demand for comforts or luxuries goods
like car, AC, TV, refrigerator, etc., its demand is generally elastic as
consumer can postpone its consumption.
3.
Proportion of the Income Spent
Smaller is the proportion
of income spent on a commodity, the smaller will be the elasticity of demand
and vice versa. For example, the demand for soap, salt, matches, etc. is highly
inelastic since consumer spends a very small proportion of income on them. And
demand for goods like cloths, TV, furniture, etc. is likely to be elastic since
the consumer spends a large fraction of his income on this goods.
4.
The Number of Uses of a Commodity
If the commodity has
several uses, then its demand will be elastic. On the other hand, a commodity
with no or few alternative uses has less elastic demand. Example: Electricity.
5.
Time Period
Demand is generally
inelastic in the short period because consumers find it difficult to change and
adjust their taste, preferences and habits, and also substitutes may not be
available in the short-run. However, demand is more elastic in long run as it
is comparatively easier to shift to other substitutes, and consumer may adjust
their preferences and consumption pattern.
6.
Postponement of Consumption
Commodities such as
biscuits, soft drinks, etc. whose demand is not urgent, have highly elastic
demand as their consumption can be postponed in case of an increase in their
prices. However, commodities with urgent demand like medicines and food have
inelastic demand because of their immediate requirement.
7.
Price Range / Level of Price
Demand for costly goods
has highly elastic demand as it is very sensitive to changes in their prices.
However, demand for inexpensive goods is inelastic as changes in prices of such
goods do not change their demand by a considerate amount.
8.
Habits of the Consumer
Commodities, which have
become habitual necessities for the consumers have less elastic demand.
Example: Alcohol, tobacco, cigarettes, etc.
