Factors determining price elasticity of Demand


The elasticity of demand depends on the following factors namely

1. Nature of the product

2. Extent of usage

3. Availability of substitutes

4. Income level of people

5. Proportion of the income spent of the product

6. Urgency of demand and

7. Durability of a product.

1. Nature of the product

The demand for products that fall in the category of necessities (eg. Rice, salt, wheat etc) are usually inelastic. This is because their demand do not change even when there is a change in price. On the other hand the demand for luxuries (TV’s, washing machines etc) are elastic where even a small change in price reflects on a huge change in the demand

2. Extent of usage:

 If a product has varied usage (eg. steel, aluminums, wood etc) then it has a comparatively elastic demand. For example, if the price of teak wood falls then its usage in many areas will be increased and the opposite happens when the price rises, the usage in some quarters will be cut down while the usage in other and will be the same.

3. Availability of substitutes:

When a product has many substitutes then its demand will be relatively elastic. This is because if the price of one substitute goes down then customers switch to that substitute and vice versa. Products without substitutes or has weak substitutes have relatively inelastic demand.

4. Income level of people:

People with high income are less affected by price changes in products while people with low income, are highly affected by price rise. People with high income will not change their buying habits because of the increase in price of either essential commodities or luxuries while other will cut back on purchase of certain commodities to compensate for the essential commodities if there is a price increase.

5. Proportion of income spent on the commodity:

When a person spends only a very small part of his income on certain products (match boxes, salt etc) the price change in these products does not materially affect his demand for the product. Here the demand is inelastic.

6. Urgency of Demand:          

If a person requires buying a product immediately no matter what or no other go but to-buy a product at that point of time, with no substitutes, the demand for that product becomes inelastic. For example if one is building a lodge and is in urgent need for completing the construction then, any price change in cement or bricks or steel etc will have little impact on the demand for those products.

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