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Factors Determining Price Elasticity of Demand

The price elasticity of demand is not the similar for all commodities. It might be or low depending upon number of factor. These factors which effect price elasticity of demand, in short-term, are as below:


Nature of Commodities. In developed countries of the world, the per capital income of the individuals is generally low. They spend a larger amount of their income on the purchase of necessaries of life such as course cloth, wheat, milk etc. They have to purchase these commodities whatsoever be their price. The demand for things of necessities is, therefore, inelastic or less elastic. The demand for luxury goods, on the other hand is more elastic.


For instance, if the price of burgers falls, its demand in the cities will go up.


Availability of Substitutes. If a commodity has greater number of close substitutes available in the market, the demand for the commodity will be more elastic.


For instances, if the price of Pepsi Cola rises in the market, people will shift over to the consumption of Coca Cola, which is its close substitute. So the demand for Pepsi Cola is elastic.


Proportion of the Income Spent on the Commodity. If the proportion of income consumed on the purchase of a commodity is very small, the demand for such a commodity will be less elastic.


For instance, if the price of a box of matches or salt increases by 50%, it will not affect the customers demand for these commodities. The demand for salt, maker box therefore will be inelastic. On the other hand, if the price of a car increases from $7 lakh to $10 lakh and it takes a larger portion of the income of the customers, its demand would decrease. The demand for car is, therefore, elastic.


Time. The period of time plays a significant role in shaping the demand curve. In the short run, when the consumption of a commodity cannot be postponed, its demand will be inelastic. In the long run if the rise price persists, individuals will find out methods to decrease the consumption of goods. So the demand for a commodity in the, long run is elastic, ceteris paribus.


For instance, if the price of electricity rises, it is very problematic to cut back its consumption in the short run. However, if the rise in price persists, people will plan substitution fluorescent bulbs, gas hetaeric. so that they use less electricity. So the electricity of demand will be larger (Ed = > 1) in the long run than in the short run.


Number of Uses of a Good. If a good or commodity can be put to a number of uses, its demand is larger elastic (Ed > 1).


For instance, if the price of coal falls down, its quantity demanded will increase considerably because demand will be coming from industries railways, households etc.


Addition. If a product is habit forming say for instance, cigarette, the rise in its price would not bring much change in demand. The demand for habit forming good is, therefore, inelastic or less elastic.


Joint Demand. If two commodities are Mutually demand, then the elasticity of demand depends upon the elasticity of demand of the other Mutually demanded commodity.


For instance, with the increase in price of cars, its demand is slightly affected, then the demand for petrol will also be inelastic or we can say less elastic.

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