Determinants of Elasticity of Demand

Elasticity of demand is not same for all goods. Some goods have high elasticity of demand while others have low elasticity of demand. Even the elasticity of demand for a particular good may differ according to the time, place and person. The factors which play a major role in determining the elasticity of demand are discussed below.

• Nature of the commodity

Commodities are classified as necessity, comforts, and luxury. Necessities satisfy the most urgent wants and without which we cannot live. Therefore price changes have very little effect on these commodities. Hence demand for necessities is inelastic. For example, when price of rice, cloth, fuel, match box rises, people will purchase almost the same amount as before because the consumption of these goods can neither be postponed nor substituted by other goods.

Comfort and luxury are those goods which are not necessary for our existence they are less urgent wants which can be postponed for the future. For example motor cars, washing machine, air conditioner etc. are not necessary for our existence. If their price rises their demand falls more than proportionately. Hence comforts and luxuries have an elastic demand.

• Availability of substitutes

When a particular want can be satisfied independently by different goods, the goods are called substitute goods. For example the demand for ‘hot drink’ can be met either by tea or by coffee. Therefore if price of tea rises, then people will consume coffee. This will reduce the demand for the more that proportionately.  Hence demand for tea is more elastic. If a commodity does not have substitute, then its demand will be inelastic. Non availability of substitute in case of a necessity like salt make its demand perfectly inelastic.

If a commodity has perfect substitutes, then its demand will be a perfectly elastic. Paddy or potato of a particular variety produced by different farmers are perfect substitutes. If one farmer raises the price, then he can sell nothing as sufficient goods are available at the going market price. Here elasticity of demand becomes infinite.

• Alternative uses

Another factor governing the elasticity of demand is the possibility of alternative uses of a commodity. If a good has several alternative uses, its demand will be highly elastic. On the other hand if a commodity has only a few uses, its demand will be inelastic. For example, electricity can be put to several uses like lighting the house, using the fan, cooking, heating, operating the washing machine etc. If electricity charges fall then people will use it for several purposes and its demand will go up more than proportionately. If electric charges rise, then it will be used only for urgent purposes.

• Proportion of Income spent

The demand for a commodity on which the consumer spends only a small proportion of his income is less elastic. For example, an average household spends only very small part of its income on commodities like match-box, post card, ink etc. If the prices of these goods rise, then consumer’s budget will most probably remain unaffected and the demand for these goods will not fall appreciably. Hence the elasticity of demand will be less.

• Possibility of postponement of consumption

The demand for a commodity is more elastic if its consumption can be postponed. On the other hand the demand will be inelastic if the use of the good cannot be put off. Take the example of diet and medicine. The consumption of diet can be postponed but not the medicine. Here demand for medicine is inelastic and that of diet is elastic.

• Durability of the commodity

Durability of the product and time also influence the elasticity of demand. When a particular good is durable and can he used for a number of years, a given change in its price will produce a less than proportionate change in quantity demanded in the short period. In the long period, the demands for durable goods will he elastic.

• Habits

By consuming a particular good again and again, it may turn into habits. The consumer becomes accustomed to that good. This is particular true in case of intoxicants like opium, wine, cigarettes etc. A rise in price of these goods will not reduce their consumption appreciably. Hence the demand is inelastic.

• Price range

Elasticity of demand depends on the price range. When prices are very high or very low. Elasticity of demand tends to be low. At high prices, only the rich can purchase the commodity. A little variation of prices does not have any significant impact on the demand of the rich. Similarly when the prices are very low, poor people consume the commodity up to the point of satiety. A little variation does not cause any appreciable change in their demand. Hence the demand becomes inelastic.