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Home Elasticity of Demand Factors Determining Price Elasticity of Demand

Factors Determining Price Elasticity of Demand:

 

The price elasticity of demand is not the same for all commodities. It may be or low depending upon number of factor. These factors which influence price elasticity of demand, in brief, are as under:

        

(i) Nature of Commodities. In developing countries of the world, the per capital income of the people is generally low. They spend a greater amount of their income on the purchase of necessaries of life such as wheat, milk, course cloth etc. They have to purchase these commodities whatever be their price. The demand for goods of necessities is, therefore, less elastic or inelastic. The demand for luxury goods, on the other hand is greatly elastic.

 

For example, if the price of burger falls, its demand in the cities will go up.

 

(ii) Availability of Substitutes. If a good has greater number of close substitutes available in the market, the demand for the good will be greatly elastic.

 

For examples, if the price of Coca Cola rises in the market, people will switch over to the consumption of Pepsi Cola, which is its close substitute. So the demand for Coca Cola is elastic.

 

(iii) Proportion of the Income Spent on the Good. If the proportion of income spent on the purchase of a good is very small, the demand for such a good will be inelastic.

 

For example, if the price of a box of matches or salt rises by 50%, it will not affect the consumers demand for these goods. The demand for salt, maker box therefore will be inelastic. On the other hand, if the price of a car rises from $6 lakh to $9 lakh and it takes a greater portion of the income of the consumers, its demand would fall. The demand for car is, therefore, elastic.

 

(iv) Time. The period of time plays an important role in shaping the demand curve. In the short run, when the consumption of a good cannot be postponed, its demand will be less elastic. In the long run if the rise price persists, people will find out methods to reduce the consumption of goods. So the demand for a good in the, long run is elastic, other things remaining constant.

 

For example if the price of electricity goes up, it is very difficult to cut back its consumption in the short run. However, if the rise in price persists, people will plan substitution gas heater, fluorescent bulbs etc. so that they use less^electricity. So the electricity of demand will be greater (Ed = > 1) in the long run than in the short run.

 

(5) Number of Uses of a Good. If a good can be put to a number of uses, its demand is greater elastic (Ed > 1).

 

For example, if the price of coal falls, its quantity demanded will rise considerably because demand will be coming from households, industries railways etc.

 

(6) Addition. If a product is habit forming say for example, cigarette, the rise in its price would not induce much change in demand. The demand for habit forming good is, therefore, less elastic.

 

(7) Joint Demand. If two goods are Jointly demand, then the elasticity of demand depends upon the elasticity of demand of the other Jointly demanded good.

 

For example, with the rise in price of cars, its demand is slightly affected, then the demand for petrol will also be less elastic.

Relevant Articles:

Meaning of Price Elasticity of Demand
Degrees of Elasticity of Demand
Measurement of Price Elasticity of Demand
Types of Elasticity of Demand
Factors Determining Price Elasticity of Demand
Importance of Elasticity of Demand
 

Principles and Theories of Micro Economics
Definition and Explanation of Economics
Theory of Consumer Behavior
Indifference Curve Analysis of Consumer's Equilibrium
Theory of Demand
Theory of Supply
Elasticity of Demand
Elasticity of Supply
Equilibrium of Demand and Supply
Economic Resources
Scale of Production
Laws of Returns
Production Function
Cost Analysis
Various Revenue Concepts
Price and output Determination Under Perfect Competition
Price and Output Determination Under Monopoly
Price and Output Determination Under Monopolistic/Imperfect Competition
Theory of Factor Pricing OR Theory of Distribution
Rent
Wages
Interest
Profits
Principles and Theories of Macro Economics
National Income and Its Measurement
Principles of Public Finance
Public Revenue and Taxation
National Debt and Income Determination
Fiscal Policy
Determinants of the Level of National Income and Employment
Determination of National Income
Theories of Employment
Theory of International Trade
Balance of Payments
Commercial Policy
Development and Planning Economics
Introduction to Development Economics
Features of Developing Countries
Economic Development and Economic Growth
Theories of Under Development
Theories of Economic Growth
Agriculture and Economic Development
Monetary Economics and Public Finance
History of Money

 

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