Factors that determine price elasticity of demand
The basic determinants of price elasticity of demand for a commodity are:
The availability of substitutes. The price elasticity of demand depends mainly on availability of substitutes, which must be within the same price range. The more substitutes a good has, the more elastic the demand for it is likely to be. The demand for tea is elastic because it has a number of substitutes — coffee, cocoa, ovaltine, milo. If the price of tea increases, consumers switch onto other substitutes. If there are no close substitutes within the same price range, the demand for the commodity is inelastic.
The degree of necessity. The nature of the need that the commodity
satisfies. Generally speaking, luxury goods are price elastic while necessities are price inelastic. For instance, if the price of salt (a necessity) increases, consumers will hardly respond. They continue buying the commodity.
However, if the price of a luxury (Butter, necklace) increases, consumers tend to give it up. The demand tends to be elastic.
satisfies. Generally speaking, luxury goods are price elastic while necessities are price inelastic. For instance, if the price of salt (a necessity) increases, consumers will hardly respond. They continue buying the commodity.
However, if the price of a luxury (Butter, necklace) increases, consumers tend to give it up. The demand tends to be elastic.
The proportion of income spent on a particular commodity. The smaller the proportion of consumers' income spent on a commodity, the more inelastic will be the demand for it. Cheap commodities like safety pin, razor blade, have inelastic demand. As the price of razor blade increases, consumers continue to buy. The percentage change in price is greater than the percentage change in quantity demanded. Expensive commodities like TV sets have elastic demand.
Consumer's income. Generally speaking, rich people have inelasticdemand. As the price increases, people continue buying the commodity. Poor people have elastic demand for commodities. This is because if the price of the commodity increases, poor people will tend to look for cheaper substitutes even if they are not available!
The number of uses to which a commodity can be put. The more the possible uses of a commodity, the more elastic is its demand. A given change in price will lead to a greater change in the quantity demanded [since there are many consumers. A commodity with a fewer number of] uses tends to have inelastic demand.
The time period. Demand is more elastic in the long run, and inelastic in the short-run. Since it may take time for buyers to react to price changes, the demand for many goods may be inelastic in the short-run. Consumers hardly respond to changes in the price in the short run. It is inelastic in the short-run because consumers may not be able to obtain substitutes. The supply may not be enough and consumers may not be aware of price changes in the short-run. In the long run, demand tends to be elastic and supply increases.
Substitutes can be found and consumers are aware of price changes.
Substitutes can be found and consumers are aware of price changes.
Habit. A habit can also influence price elasticity of demand. Individuals with certain habits are faced with inelastic demand. There is hardly any response to price changes. For instance, individuals who have a smoking habit tend to have inelastic demand.