Factors Affecting Price Elasticity of Demand

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In this article, we have explained different factors affecting the price elasticity of demand

The value of price elasticity of demand is based on so many factors and such factors are collectively called determinants of price elasticity of demand. If the magnitude of price elasticity of demand is greater than one then the demand is elastic or price-sensitive (consumers having elastic demand are more price sensitive) and if the magnitude of price elasticity of demand is less than one then demand is price inelastic (consumers having elasticity less than one are price-insensitive). Some of the major factors affecting the price elasticity of demand are briefly explained below.

Availability of Close Substitute

If a good has close substitutes or when close substitutes are available for the goods, then its demand will be an elastic demand and a good with no close substitutes will have an inelastic demand. For example, commodities such as pens, cold drinks, cars, etc. have close substitutes. When the price of these goods rises, the price of their substitutes remaining constant, there is a proportionately greater fall in the quantity demanded of these goods. That is, their demand is elastic. Commodities such as prescribed medicines and salt have no close substitutes and hence, have an inelastic demand.

Income of the Consumers

If the income level of consumers is high, the elasticity of demand is less. It is because the change in the price will not affect the quantity demanded by a greater proportion. But in low-income groups, the elasticity of demand is high.

Nature of a Commodity

The price elasticity of demand is low for necessary goods and it is generally high for luxuries goods. A good or service that the consumer must have such as food (bread, milk) and medicines, etc. is known as necessary goods. On the other hand, luxuries goods are those goods that are pleasant but not necessary. For instance, dinner in a 5-Star hotel. If the price of necessities rises, then demand will not fall by a greater proportion because their purchase cannot be postponed and as a result, the price elasticity of demand in case of necessity is low.

The Proportion of Total Expenditure Spent on the Product

Higher the cost of the goods relative to the total income of the consumer more will be the price elasticity of demand. For example, if the price of inexpensive goods like bread, ink, salt, matchbox, etc, doubles it would have nearly no effect on the quantity demanded of them. On the other hand, if the price of expensive goods like a car, high-value brand gazettes doubles then the quantity demanded will fall by a greater proportion showing high price elasticity of demand.

Number of Uses of the Commodity

If any commodity can be put into several usages, then its demand is more elastic. On the other side if a commodity has few uses then it has an inelastic demand. For example goods like milk, eggs, and electricity can be put to many different uses and hence, enjoy elastic demand, i.e., when prices are low, demand increases by a greater proportion as the goods can now be put to less important uses also.

Time

If the time needed to find substitutes for the commodity is more, the price elasticity of demand is more and vice versa. For example, flying by airplane has inelastic demand as no substitutes are available in the short run.

Possibility of Postponement of the Demand

If the demand for a particular commodity is easy to postpone to a future date, then its demand is more elastic. Such a commodity will be preferred more when the price goes down and less when the price goes up. If the demand for a particular product is not possible to postpone to the future, then its demand is less elastic. For example, demand for a house can be postponed and demand for education cannot be postponed to the future.

Habitual Influence

If the consumer is habitual to the consumption of any good like a cigarette, coffee, tea, alcohol, etc. of a specific brand then demand for that product is less elastic or inelastic. It means the buyer will buy these products even at increased prices.

Summary Table

FactorsThe Elasticity of Demand is More when…
Availability of substitutes.More substitutes are available.
Income of the consumers.The income of the consumer is less.
Luxuries versus necessitiesHigh-priced luxuries are available.
The proportion of total expenditure spent on the product.The proportion of total expenditure spent is more.
The number of uses of the purchased commodity.The number of uses of the good is more.
Time.The time required to find substitutes is more.
Postpone of consumptionIf consumption can be postponed
Summary Table of Factors Affecting Price Elasticity of Demand

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