Factors Determining Price Elasticity of Demand
Posted by Ripon Abu Hasnat on Monday, November 17, 2014 | 0 comments
The factors that determine elasticity of demand
are numberless. But the most important among them are the nature, uses and
prices of related goods and the level of income. They are stated below:
I. Nature of the commodity: Generally, all
commodities can be divided into three categories i.e.
(i) Necessaries of Life. For necessaries of life the
demand is inelastic because people buy the required amount of goods whatever
their price. For example, necessaries such as rice, salt, cloth are purchased
whether they are dear or cheap.
(ii) Conventional
Necessaries. The demand for conventional necessaries is less elastic or inelastic.
People are accustomed to the use of goods like intoxicants which they purchase at
any price. For example, drunkards consider opium and wine almost as a necessity
as food and water. Therefore, they buy the same amount even when their prices
are higher and highest.
(iii) Luxury Commodities.
The demand for luxury is
usually elastic as people buy more of them at a lower price and less at a higher
price. For example, the demand of luxuries like silk, perfumes and ornaments
increases at a lower price and diminishes at a higher price. Here, we must keep
in mind that luxury is a relative term, which varies from person to person,
place to place and from time to time. For example, what is a luxury to a poor
man is a necessity to the rich. The luxury of the past may become a necessity
of today. Similarly a commodity which is a necessity to one class may be a
luxury to another. Hence, the elasticity of demand in such cases should have to
be carefully expressed.
2. Substitutes. Demand is elastic for those
goods which have substitutes and inelastic for those goods which have no
substitutes. The availability of substitutes, thus, determines the elasticity
of demand. For instance, tea and coffee are substitutes. The change in the price
of tea affects the demand for coffee. Hence, the demand for coffee and tea is
elastic.
3. Number of Uses. Elasticity of demand for
any commodity depends on its number of uses. Demand is elastic; if a commodity
has more uses and inelastic if it has only one use. As coal has multiple uses,
if its price falls it will be demanded more for cooking, heating, industrial
purposes etc. But if its price rises, minimum will be demanded for every purpose.
4. Postponement. Demand is more elastic for
goods the use of which can be postponed.
For example, if the price of silk rises, its
consumption can be postponed. The demand for silk is, therefore, elastic.
Demand is inelastic for those goods the use of which is urgent and, therefore,
cannot be postponed. The use of medicines cannot be put off. Hence, the demand
for medicines is inelastic.
5. Raw Materials and
Finished Goods. The demand for raw materials is inelastic but
the demand for finished goods is elastic. For
instance, raw cotton has inelastic demand
but cloth has elastic demand. In the same way,
petrol has inelastic demand but car itself
has only elastic demand.
6. Price Level. The demand is elastic for
moderate prices but inelastic for lower and
higher prices. The rich and the poor do not
bother about the prices of the goods that they
buy. For example, rich buy Benaras silk and
diamonds etc. at any price. But the poor buy
coarse rice, cloth etc. whatever their prices
are.
7. Income Level. The demand is inelastic for
higher and lower income groups and elastic for middle income groups. The rich
people with their higher income do not bother about the price. They may
continue to buy the same amount whatever the price. The poor people with lower
incomes buy always only the minimum requirements and, therefore, they are
induced neither to buy more at a lower price nor less at a higher price. The middle
income group is sensitive to the change in price. Thus, they buy more at a
lower price and less at higher price.
8. Habits. If consumers are habituated
of some commodities, the demand for such commodities will be usually inelastic.
It is because that the consumer will use them even their prices go up. For
example, a smoker does not smoke less when the price of cigarette goes up.
9. Nature of Expenditure. The elasticity of demand
for a commodity also depends as to how much part of the income is spent on that
particular commodity. The demand for such commodities where a small part of
income is spent is generally highly inelastic i.e. newspaper, boot-polish etc.
On the other hand, the demand of such commodities where a significant part of
income is spent, elasticity of demand is very elastic.
10. Distribution of Income.
If the income is uniformly
distributed in the society, a small change in price will affect the demand of
the whole society and the demand will be elastic. In case of unequal
distribution of income and wealth, a change in price will hardly influence the
poor section of the society and the demand will be relatively inelastic.
11. Influence of
Diminishing Marginal Utility. We know that utility falls when we consume
more and more units but not in a uniform way. In case utility falls rapidly, it
means that the consumer has no other near substitutes. As a result, demand is
inelastic.
Conversely, if the utility falls slowly, demand
for such commodity would be elastic and raises much for a fall in price.
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