The key factors which determine the price elasticity of demand are discussed below −

Substitutability

Number of substitutes available for a product or service to a consumer is an important factor in determining the price elasticity of demand. The larger the numbers of substitutes available, the greater is the price elasticity of demand at any given price.

Proportion of Income

Another important factor effecting price elasticity is the proportion of income of consumers. It is argued that larger the proportion of an individual’s income, the greater is the elasticity of demand for that good at a given price.

Time

Time is also a significant factor affecting the price elasticity of demand. Generally consumers take time to adjust to the changed circumstances. The longer it takes them to adjust to a change in the price of a commodity, the lesser price elastic would be to the demand for a good or service.

Income Elasticity

Income elasticity is a measure of the relationship between a change in the quantity demanded for a commodity and a change in real income. Formula for calculating income elasticity is as follows −

Following are the Features of Income Elasticity −

·        If the proportion of income spent on goods remains the same as income increases, then income elasticity for the goods is equal to one.

·        If the proportion of income spent on goods increases as income increases, then income elasticity for the goods is greater than one.

·        If the proportion of income spent on goods decreases as income increases, then income elasticity for the goods is less by one.