DETERMINANTS
OF PRICE ELASTICITY OF DEMAND
Elasticity of demand differs from
commodity to commodity. The various factors upon which elasticity depends are
the following:
1.
Substitute
goods: A commodity will have elastic demand
if there are good substitutes for
it. This is because when price of a good rises, a consumer will not buy the
good but purchase its substitute.
2.
Nature
of commodity: All necessities
like salt, rice etc that have no substitutes/or less substitutes will have an inelastic demand. People have to purchase
such commodities for their sustenance. Therefore, there will be some demand
despite the changes in price. Demand for luxury goods, on the other hand, will
be elastic. If prices of such commodities rise even a little, consumers refrain
to buy. At the same time a little lowering of price of such commodities attract
a large number of consumers.
3.
Number
of uses of commodity: The larger the
number of uses to which a commodity can
be put, the higher will be its elasticity. Therefore the demand of such goods
will have elastic demand. For example, milk can be used for various purposes
such as for making curd, cake, sweets etc. When its price goes down, demand
increases but a little rise in its price makes demand fall greatly.
4.
Possibility
of postponement of consumption: If there is a
possibility of postponement of
consumption of a commodity then demand will be elastic otherwise inelastic.
Demand for certain goods can be postponed for sometime such as computers,
printers, scanners etc. People may wait till they become cheaper. Therefore,
their demand is elastic. But the demand for food or electricity cannot be
postponed. As such their demand is inelastic.
5.
Percentage
of income spent: The elasticity
of demand is also influenced by the percentage
of income spent on the purchase of a commodity. If the percentage is very less
then the demand will be inelastic. For instance, we spend a very less amount of
our total money income on things like agarbatties (incense sticks), matches,
pens, pencils etc. If prices of such commodities rise also, our demand is not
reduced. Thus, demand of such goods is inelastic.
6.
Fashion: Commodities, which are in fashion, will have inelastic
demand. Fashion minded people do not
compromise with price. Even if price is high, some people will demand more just
because goods are in fashion.
7.
Change
in taste: A habitual
commodity or a commodity for which consumers have developed a taste will have inelastic demand. A chain smoker
always requires a cigarette, whatever the price may be. Likewise, a habitual
paan (betel nut) chewer cannot leave his habit, in spite of rise in price. In
such cases, therefore, demand is elastic.
8.
Price
of the commodity: Very high
priced or very low priced goods have low elasticity whereas moderately priced commodities are quite high-elastic. If a
good is very expensive, demand will not increase much even if there is little
fall in its price. And demand will not increase even at very low prices,
because people have already purchased their requirement at low prices.