Factors determining Price elasticity of demand

Price elasticity of demand (PED or Ed) is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price. More precisely, it gives the percentage change in quantity demanded in response to a one percent change in price ( i.e. holding constant all the other determinants of demand, such as income)

1. Availability of substitutes:

A commodity will have elastic demand if there are good substitutes for it. A small rise in the price of a commodity will send buyers to the substitutes. A lower price of a commodity will invite the former buyers of the substitute goods. A rise in the price of Brooke Bond tea may encourage buyers to use Lipton tea and vice versa. If no substitutes are available, demand for goods will be inelastic. Demand for salt is perfectly inelastic because it has no substitute.

2. Nature of the commodity:

Demand for necessaries is inelastic, because they are indispensable for human existence. On the other hand, the demand for comforts and luxuries is generally elastic because these goods are not very essential for life and are demanded only when their prices are reasonable.

3. Postponement of consumption:

The demand for goods the consumption of which can be deferred for some time is elastic as the demand for the V.C.R. it can be postponed for some time if prices are higher. The demand for necessaries like food grains is inelastic because their use cannot be deferred.

4. Proportion of expenditure:

The demand for a good on which a small proportion of income is spent is inelastic. Salt, matchbox, and soap etc. are its examples. On the contrary, the demand for such commodities where a major part of income is spent is elastic like the demand for comforts and luxuries.

5. Alternative use:

A commodity having several uses has an elastic demand. For example, electricity, coal, and steel etc. have several uses. The uses to which electricity raises demand for electricity for cooking or heating rooms etc. will fall. It will be used only for the most important purpose. Similarly, with a fall in its price it will be used only for other purpose. On the other hand, a commodity having only one use will have inelastic demand. It may be mentioned that the demand for a good may be elastic for one use and inelastic for another.

6. The time period:

Elasticity of demand varies with the length of the time period. Generally, longer the duration of period. Greater will be elasticity of demand and vice versa. This implies that demand is elastic in the long period and inelastic in the short period. This is so because in the short period generally demand does not change immediately due to price changes.

7. Habit:

If consumers are habituated with certain goods the demand for such goods will be usually inelastic because they will use them even when their prices go up. A smoker generally does not give up smoking or does not smoke less when the price of cigarette goes up.

8. Joint demand:

In the event of a good being jointly demanded such as car and petrol, the elasticity of demand of the second good depends on the elasticity of demand of the main good. For example, if the demand for car is inelastic, the demand for petrol will also be inelastic.

9. Distribution of income:

The more equal distribution of income, the more will be the number of middle-class people. Their demand is relatively more elastic. If the distribution of income is not equal, on the one hand, there will be poor people and on the other hand, there will be rich people. The poor people will buy only necessaries and their demand will be inelastic. The rich will not be affected by price changes. Hence, the demand of the rich will also be inelastic.

10. Price Level:

The demand for very costly and very cheap goods is inelastic. Very costly goods are demanded by the rich. Their demand is not affected by price changes. Similarly changes in the price of very cheap goods like salt or match box will not affect on their demand. At a very low price, everybody can purchase a good in enough quantity. Usually demand will be elastic at moderate prices

11. 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.

12 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.

13. 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.

14. 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.

15. 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.

16. 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.