Four factors that affect price elasticity of demand

Factors Affecting the Price Elasticity of Demand | EconomicsArticle Shared by ADVERTISEMENTS:The following points highlight the seven main factors affecting the price elasticity of

Four factors that affect price elasticity of demand

Factors Affecting the Price Elasticity of Demand | EconomicsArticle Shared by

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The following points highlight the seven main factors affecting the price elasticity of demand. The factors are: 1. Nature of the Good 2. Availability of Substitute Goods 3. Number and Variety of Uses of the Product 4. Proportion of Income Spent on the Good 5. Role of Habits 6. Possibility of Deferment of Consumption 7. Price of the Good.

Factor # 1. Nature of the Good:

The elasticity of demand for a good depends upon the nature of the good, i.e., whether the good is a necessary or a luxury good. The elasticity of demand for a necessary good is relatively small. For example, if the price of such a good rises, its buyers generally are not able to reduce its demand.

Again, if the price of a necessary good diminishes, the buyers cannot considerably increase their purchase of the good, since the good is a necessity, they had been purchasing the required quantities at the previous price. For example, rice is very much a necessary good to us, and so its demand cannot be reduced considerably when its price rises.

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On the other hand, when its price falls its demand do not considerably increase because it had already been purchasing (at the previous price) almost all that it needed, since it is a necessity to us. Therefore, the more necessary a good is to us, the less would be its price-elasticity of demand.

But, elasticity of demand for a luxury good is generally high. This is because the consump­tion of a luxury good, unlike that of a necessary commodity, can be deferred. That is why if the price of such a good increases, the demand for the good can be considerably reduced.

On the other hand, if the price of a luxury good diminishes, the demand for the good would consider­ably increase, since, along with new demand, all deferred demands would now be satisfied. Therefore, demand for luxury goods would be relatively more elastic.

Factor # 2. Availability of Substitute Goods:

If close substitutes for a particular good are available in the market, then the demand for the good would be relatively more elastic. For example, since tea, a close substitute for coffee, is available in the market, a rise in the price of coffee would result in a considerable fall in its demand and a consequent rise in the demand for tea.

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Therefore, demand for coffee would be relatively more elastic because of the availability of tea.

Again, conversely, if the price of coffee decreases, then people might reduce their consumption of tea and they might considerably increase their use of coffee. Therefore, the de­mand for coffee would be relatively more elastic, since its close substitute, viz., tea, is available in the market.

Again, since egg and meat are available in the market as close substitutes for fish, demand for fish would be relatively more elastic. It may concluded that the more the number of close substitutes for a particular good, the more would be the price-elasticity of demand for the good.

Factor # 3. Number and Variety of Uses of the Product:

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The more the number and variety of uses of a good, the more would be its elasticity of demand. One such good is electricity that is used in a number of ways. For example, use of electricity for the purposes of lighting, heating, cooking, ironing and also use electricity as a source of power in industries.

That is why when the price of electricity diminishes (increases), its demand will increase (decrease) in all these uses, and so, in totality, its demand will increase (decrease) considerably, giving us a high value of the (numerical) coefficient of price-elasticity of demand.

Factor # 4. Proportion of Income Spent on the Good:

The price-elasticity of demand for a good also depends on the proportion of their income the buyers spend on the good. If the buyers spend a small proportion of their income, then they would not considerably decrease their purchase of the good as its price increases.

On the other hand, since the buyers spend a small proportion of their income on the good, they buy the good more or less according to their requirement at any particular price. Therefore, when the price of the good decreases, they do not considerably increase their purchase.

It is concluded then that if the buyers spend a small proportion of their income on a good, then its price-elasticity of demand would be relatively small. On the other hand, if they spend a large proportion of their income on a good, then its elasticity of demand would be relatively high. That is, elasticity of demand for a good depends upon the proportion of income spent on the good.

Factor # 5. Role of Habits:

The habits of people also play an important role in determining the extent of the elasticity of demand for a good. Sometimes some people completely surrender to the consumption of articles of addiction like drugs, alcohol and tobacco products. Consequently, if the prices of these goods increase, demand for them do not decreases considerably and so their elasticity of demand will be relatively small.

Factor # 6. Possibility of Deferment of Consumption:

if the buyers are able to defer the purchase or consumption of a good, if required, then it would have a relatively high elasticity of demand. For, if its price rises, its purchase would be deferred and its demand would fall, and if its price falls the deferred demand would appear in its market. The examples of such a good are building materials like cement, iron rods, etc.

Factor # 7. Price of the Good:

The elasticity of demand for a good also depends on its own price. As price changes, quantity demanded of the good changes, owing to the law of demand. Also, at different prices of the product, i.e., at different points on the demand curve for a good, the coefficient of price-elasticity of demand for the good would be different.

Generally, the smaller the price of a good, the less is the elasticity of its demand. For, when the price is very small, a change in price would have no considerable effect on demand.

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On the other hand, the larger the price, the more would be the elasticity of demand. For, when the price is relatively large, a further rise in price would have a considerable dampening effect on de­mand and a fall in price would have an encouraging effect on demand.

Microeconomics, Demand, Elasticity, Price Elasticity of Demand

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