Question

Factors determining elasticity of demand.

Answer 1

(a) Nature of Commodity: By Nature commodities are classified as necessaries, comforts and luxuries. Normally Demand for necessaries like food grains are relatively Inelastic and for comforts and luxuries like diamond, perfumes, etc is relatively Elastic.
(b) Availability of Substitutes: The larger the number of substitutes available for a commodity, the greater would be the elasticity. Demand for products like soap, soft drinks, detergents, tooth paste, etc. have many substitute so demand is elastic. However, salt, garlic, onions have no substitute so demand is inelastic.
(c) Uses of Commodity: Single use commodities have less elastic demand and multi-use goods like coal, electricity, sugar, etc. have relatively elastic demand.
(d) Durability of the Commodity: The demand for durable goods like T.V., car, fridge, etc is relatively inelastic in the short run and elastic in the long run. Whereas the demand for perishable goods is relatively inelastic.
(e) Range of Price: The demand for commodities which are highly prices and will have a inelastic demand like AC, Car, etc. Even very low prices goods have inelastic demand.
(f) Consumer's Income: Generally if income is very high, the demand for over all commodities tends to be relatively inelastic. The demand pattern of the rich people is rarely affected even when there is significant price change.
(g) Influence of Habits and Customs: When a person is habituated to consumer a certain commodity, the demand will be inelastic for e.g. demand for cigarettes to a chain smoker is inelastic.
(h) Time Period: The demand for goods is less elastic in the short period and more elastic in the long period. This is because (1) in the long period consumer are better informed about their price (2) habits of consumer's change in the long run (3) durable goods get worn out in the long period.
(i) Proportion of Income Spend: If consumer spends a very small proportion of his income on a commodity, the demand for it will be relatively inelastic and vice-versa of eg. demand of salt, newspaper, pins are inelastic.
(j) Urgency and Postponement: If the demand for a commodity is urgent then demand for it will be inelastic. Eg. demand for medicine for a patient. Whereas, if the demand for a commodity can be postponed it will have elastic demand.
(k) Complementary Goods: Complementary goods are those goods which are demanded jointly such as car and petrol, mobile and sim cards etc. Demand for petrol will be inelastic as car cannot run without petrol.