FACTORS AFFECTING PRICE ELASTICITY OF DEMAND

Price elasticity of demand may be defined as the measure of degree of responsiveness of demand for a commodity to change in its price.

There are various factors which determine the price elasticity of demand which are discussed as under:

AVAILABILITY OF CLOSE SUBSTITUTES

When a commodity has a large number of substitutes available in the market, the demand for such a commodity is generally very elastic. This is because even a small rise in the price of such a commodity will induce the consumers to go for its substitutes leading to a drastic fall in its demand. Eg. Pepsi and Coca Cola

SHARE IN TOTAL EXPENDITURE

Price elasticity of demand of demand also depends on the proportion of the consumer’s income that is spent on the product. If the proportion spent on the product is high, the demand is elastic and vice versa. Goods like salt, sugar, matchbox etc which constitute a very small portion of the consumer’s income have inelastic demand. This is because even if the prices of such goods increase, the consumer continues the consumption of these commodities. However, if the proportion of income spent on a commodity is large, the demand for such a commodity will be elastic.

HABITUAL NECESSITIES

The demand of a commodity is inelastic if its consumption becomes a habit for the consumers. This is because the consumer continues the consumption of such commodities even when there is a rise in the prices of such commodities. For eg. Alcohol, cigarettes, tobacco etc.

TIME PERIOD

Elasticity of demand is highly dependent on the time period. The price elasticity of demand is generally higher in the long run and low in a shorter period.

NATURE OF COMMODITY

There are three types of commodities: necessities, comfort goods and luxury goods.

The demand for necessities is inelastic. Commodities like food grains, vegetables, medicines are to be consumed for the survival. Hence, even when the prices of such goods increase, there is no change in their demand.

In case of comfort goods like tv, fan, cooler etc. the price elasticity of demand is high. This is because when the prices of comfort goods increase, consumers reduce or postpone the consumption of these goods.

The other type of goods is luxury goods which have an inelastic demand. Such goods are generally consumed by upper middle or higher class people. Hence, increase in their prices doesn’t bring any change in their consumption.

VARIOUS USES OF A COMMODITY

Commodities which have multiple uses generally have an elastic demand. This is because when the prices of such goods increase, they are used only in case of urgency which reduces the demand of such goods.

POSSIBILITY POF POSTPONEMENT

The goods whose consumption can be postponed in case of increase in their prices like chocolates, air conditioner, cars etc. have an elastic demand while the goods whose consumption can’t be postponed like life saving drugs and other medicines have an inelastic demand.

LEVEL OF PRICES

Level of price also affects the price elasticity of demand. Costly goods like laptop, Plasma TV, etc. have highly elastic demand as their demand is very sensitive to changes in their prices. However, demand for inexpensive goods like needle, match box, etc. is inelastic as change in prices of such goods do not change their demand by a considerable amount.

By Mrs Rupali Popli

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