10 Main Factors on which the Price Elasticity of Demand Depends

The Most important factors on which the Price elasticity of demand depends are listed below:

i. Nature of commodity:

The elasticity of demand for any commodity depends upon the category of commodity to which it belongs. For instance, if the commodity belongs to necessities, such as, salt, food, etc., the price elasticity is very low.

Likewise, for luxury goods, price elasticity is high, while for prestige goods, such as, jewels, rare coins, rare paintings, etc., is close to zero.

commodity

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ii. Availability of substitutes:

Commodities with no substitutes have inelastic demand while those with available substitutes have highly elastic demand. For instance, a rise in price of tea reflects in a rise in demand of coffee even when coffee prices do not fall.

iii. Multiplicity of use:

Demand for goods that have more than one use is generally more elastic. For instance, commodities such as milk, coal, and electricity that have multiple uses have highly elastic demand. Such commodities are referred to as composite commodities. On the contrary, single use goods have comparatively less elastic demand.

iv. Joint use:

Some commodities are jointly demanded. For example, a car is demanded jointly with petrol, and an ink-pen jointly with ink. The car is useless without petrol and so is the ink-pen without ink.

If demand for cars is less elastic, so is the demand for petrol. The same is case with the demand of ink-pens with that of ink. The elasticity of demand of one commodity depends upon that of the other commodity.

v. Deferred consumption:

Commodities whose consumption can be deferred have an elastic demand. For instance, when the price of consumer durables such as refrigerators, TVs, etc., rises, their demand is postponed.

vi. Habits:

People who are habituated to the consumption of a particular commodity like coffee, tea, or cigarettes of a particular brand, demand for such products is inelastic.

vii. Income group of consumer:

Demand for commodities used by individuals belonging to higher income group is less elastic. Whether the price rises or falls, it does not matter for the rich who take a liking for a product.

viii. Proportion of income spent:

If an individual spends a small proportion of his/her income on a product, the demand for such products is less elastic.

ix. Price level:

When the price level is high, demand for commodities is elastic and when it is low, demand is less elastic.

x. Time factor:

The shorter the time period of demand, the lesser the price elasticity and the longer the time period, the higher the price elasticity. If a consumer has to buy a product at short notice, he/she cannot wait for price to fall nor can he/she think of a way-out or of a substitute. If installation of a particular brand of electric metre is made a precondition of electric supply all of a sudden, consumers have to buy the device whatever the price.

If given time and choice, they may find cheaper substitutes or other producers may come up with cheaper substitutes. The producers of the brand in question under the situation would feel compelled to set a lower price or a gradually reducing price.

Submitted by : Professor Neela, Category : Knowledge