In this note, we are discussing about the Determinants of Price Elasticity of Demand or Factors on which elasticity of demand depends. Welcome to Poly Notes Hub, a one stop solution for Diploma Engineering Notes for Polytechnic Students.
Author Name: Arun Paul.
Determinants of Price Elasticity of Demand
Followings are the factors on which elasticity of demand depends:
1. Nature of Goods
If the product is an essential good, such as food or shelter, then elasticity is low because even if prices rise, demand does not decline considerably. However, elasticity is high for luxury goods such as electronics and jewellery, because a slight increase in price results in a significant decrease in demand.
2. Durability of the Goods
If the commodities are easily unstable, such as milk or seafood, then the demand is inelastic. However, demand for durable products such as furniture and electronics is consistent, as when prices fall, demand increases significantly.
3. Presence of Substitute Goods
If a good has multiple alternatives, as the price rises, buyers will transfer to the substitutes, causing demand to fall significantly. So demand is elastic. However, if there is no substitute, purchasers would continue to buy the goods even as prices grow. So demand is not elastic.
4. Alternative Uses of a Goods
If a product has more than one application, lowering its price will cause it to be used for several purposes, resulting in a significant increase in demand. Consequently, demand becomes elastic. However, if it just has one use, lowering the price will not significantly increase demand. So demand is inelastic.
5. Price change
If prices vary by a tiny amount, purchasers are unconcerned, and demand does not alter significantly. However, if prices fluctuate considerably, so will demand.
6. Proportion of Income Spent
The elasticity of products is determined by the proportion of one’s money spent on them. If a substantial share of money is spent, then the demand is elastic; otherwise, it is inelastic.
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