PRICE ELASTICITY OF DEMAND
Price Elasticity of demand is the rate at which quantity purchased changes with the change in price. It is the ratio of percentage change in quantity demanded to percentage change in the price of the commodity, other Factors affecting Price Elasticity of Demand remaining the same.
Ed= (-) Percentage change in quantity demanded/ Percentage change in price
FACTORS AFFECTING PRICE ELASTICITY OF DEMAND
The Factors affecting Price Elasticity of Demand are as follows:
NATURE OF COMMODITY
Nature of the commodity is the most important factor that affects the price elasticity of demand. There are three types of commodities: Necessaries, Comforts and luxuries. Necessaries are those goods which are mandatory for survival of human being. Comforts are those which make our life smooth and happy living. Luxuries are the goods considered as status symbol. The price elasticity of demand of these three kinds of goods is:
|NATURE OF GOODS||PRICE ELASTICITY OF DEMAND|
AVAILABILITY OF SUBSTITUTES
Substitutes are those which can be used in place of one another. Example: Tea and Coffee, Pepsi and Coke etc. The price elasticity in case of availability of substitutes is:
|Easy Availability of Substitutes||Highly Elastic Demand|
|Less Substitutes Available||Less Elastic Demand|
ALTERNATIVE OR MULTIPLE USES
There are some commodities which can be used alternatively or these commodities have multiple uses like milk, coal etc. The demand for these goods rises as the price falls and vice versa. The price elasticity of demand in this case is as follows:
|Goods having Multiple uses||Highly Elastic Demand|
|Goods having Single use||Less Elastic Demand|
In Economics, the time is divided into two horizons: Short Period and Long Period. The elasticity of demand is also get affected by the duration of time.
|Long time period||Highly elastic demand|
|Short time period||Less elastic demand|
INCOME OF CONSUMER
Elasticity of demand for a commodity also depends upon the income level of the consumers. If the buyers are high end consumers i.e. rich, they will not care for the price. Accordingly, elasticity of demand is expected to be low. Example: Demand for cars by multi-billionaires. On the other hand, if income level of the buyers is low, elasticity of demand is expected to be high. Example: Demand for small cars by the middle class people in India.
LEVEL OF PRICE
Elasticity of demand also depends upon the level of price of the commodity. The commodities having the highest or lowest price carry less elasticity of demand. On the contrary, the commodities with medium ranged price have highly elastic demand.
|High price||Less elastic demand|
|Medium price||Highly elastic demand|
|Low price||Less elastic demand|
STANDARD OF LIVING
The society where the standard of living of the people is high, the elasticity of demand is low and where the standard of living is low, the elasticity of demand is high.
POSTPONEMENT OF USE OF COMMODITY
The commodities whose demand can be postponed in near future have more elastic demand. Example: Demand for luxury furniture or car etc. Whereas for those goods whose demand cannot be postponed have less elastic or inelastic demand. Example: Demand for food.
HABITS OF CONSUMER
Commodities which have become habits of consumer have inelastic demand because demand does not get affected by change in price.
There are some commodities which are demanded jointly. Example: complementary goods like pen and ink, car and petrol. Elasticity of demand for such goods is inelastic.
PROPORTION OF INCOME SPENT ON A COMMODITY
Goods on which consumer spend a small proportion of their income like toothpaste, newspaper etc. will have an inelastic demand. On the other hand, goods on which the consumers spend a large proportion of their income like clothes, scooter etc. tends to have elastic demand.
Briefly, goods with multiple uses, carrying a high price tag, and having a large number of close substitutes tend to show higher elasticity of demand than the goods which are low priced, are essentials of life and do not have close substitutes.