Factors Determining Price Elasticity of Demand

There are several factors which determine the price elasticity of demand.

Nature of the commodity:

The elasticity of demand for necessities of life is generally inelastic because due to increase in price, the demand for necessary commodities does not contract generally proportionately. However, for comforts and luxuries the elasticity of demand is elastic because even a smaller change in price brings bigger changes in quantity demanded. For example demand for wheat, sugar, rice, vegetables etc. is inelastic being necessities and for motor cars, air conditions demand is elastic being comforts and luxuries.

Number of substitutes:

If more substitutes are available for a product it would be more easy for consumers to shift from one product to another and consequently more elastic their demand would be. For example bathing soaps, tooth pastes, edible oils, soft drinks etc. have many substitutes that can be used for one another. On the other hand, electricity has no close substitute. Therefore, demand for electricity would be inelastic.

Goods having several uses:

Certain goods have different uses e.g. electricity is a necessity for certain uses, while for other uses it is a comfort or luxury. Use of electricity in the industry, for commercial purposes and for households also is a necessity and electricity used for decorative lighting is a luxury. Elasticity will be measured depending upon the use. More important the use is more inelastic the demand would be and less important the use is, more elastic the demand would be.

Durable Goods and perishable goods:

Demand elasticity is determined on the basis whether a good is durable or perishable. Generally demand for durable goods can be postponed. For example if there is a very high rise in prices, demand for motor cars, deep freezers, air conditioners can be postponed while perishable goods like fresh milk, vegetables and fruit etc. have inelastic demand as their use cannot be postponed.

Price Level:

Elasticity of demand for those goods which are either high priced or low priced is inelastic. An increase or decrease in price of high priced goods does not have greater impact on rich class. For example a change in price of “Mercedes” motor car will not yield significant effect on high rich class while lower middle class cannot purchase very high priced commodities already. However, if the commodity is low priced then it is already purchased in sufficient quantity so further fall in price does not cause an increase in demand. For example if the price of potatoes is Rs.10 per kg every consumer will be purchasing sufficient quantity. One rupee rise or fall in price would not cause any significant impact on demand.

Income Level:

For rich, elasticity of demand for different commodities is inelastic as an increase in price does not affect their consumption expenditure. For poor, elasticity of demand is elastic because even a smaller change in price brings greater change in demand. For example if price of petrol goes up by Rs. 50 per litre or falls by Rs. 50 per litre it will not cause significant change in the demand for rich class but would cause significant changes in the demand pattern of the less privileged and middle class people.

Consumer’s Loyalty:

Some goods and services are addictive in nature for example alcohol, drugs, cigarettes etc. Any rise in price will be unable to stop the use of these goods by addicted consumers. So their demand will be inelastic. Similarly some firms try to make their customers more and more brand loyal by excessive and persuasive advertisement. Their advertisement activities help them to develop habits of their brand. For example branded cellular phones and tablets.

Time:

Some goods are demanded in emergency for example lifesaving medicines. Their demand cannot be postponed. Therefore, demand elasticity is inelastic. However, goods like houses, motor cars have elastic demand because consumers can take enough time to adjust their demand.

Proportion of Income spent on the good:

Goods like “match box” are those goods on which consumers spend a very small proportion of income. Therefore, consumers remain indifferent to any change in price. But goods like LED TV, Houses, motor cars etc. are those goods on which a large proportion of consumers’ income is spent and therefore, these become elastic towards the price changes.