Price Elasticity Factors, Business Economics Assignment Help

Business Economics - Price Elasticity Factors, Business Economics

Price Elasticity Factors

For some goods, elasticity of demand is high and for some demand is inelastic or less elastic. The degree of elasticity depends upon a number of factors. These are:

1. Availability of Substitutes: One of the most important determiners of elasticity of demand for a commodity is the availability of its close substitute. The higher the degree of the closeness of the substitute the greater the elasticity of demand for commodity. For instance, coffee and tea may be considered close substitutes for each other. If the price of coffee rises, we may curtail its purchase and take to tea and vice-versa.

2. Nature of the Commodity: The demand for necessities is generally inelastic because the consumption of a necessary article does not change in prices. Demand for comforts and luxuries like fans, tape recorders, T.V set etc. is relatively more elastic. If the price of a T.V set rises, its purchase can be dispensed with because it is not a necessary or urgent good. If the price of a tape recorder falls many people will purchase tape recorders.

3. Share in total Expenditure: a commodity in which the amount spent constitutes a small fraction of the total expenditure is apt to be inelastic. Coat buttons are an example a lower price of coat buttons will not simulate demand for coat buttons.

4. Number of uses: If a commodity can be put to several uses its demand trends to be elastic. Every fall in its price induces people to put it to less urgent uses.

5. Distribution of income: According to Proff. Tausing when the distribution of wealth in a country is even the demand for most of the goods is elastic, because the equality of income will decrease the number of the middle class people having nearly the same purchasing power.

6. Consumer's behavior: Above all the most important factor is the consumer's tastes and preferences. A smoker of Wills Flake Cigarettes or a consumer of Ponds cosmetics shall not give up consumption of these commodities because of a small rise in their prices. Demand for such products can say to be elastic in nature. 

7. Durability of the commodity: if the commodity is durable or repairable a rise in price is likely to be followed by the use of same commodity already purchased after due repairs for longer period. Thus, such commodities are likely to have elastic demand.

8. Income Level: people with high incomes are less affected by price change than people with low incomes. A rich man will not curtail his consumption of fruit or milk even its price rises significantly and will continue to purchase the same quantity as before. But a poor man cannot do so. Hence, the demand for fruit or milk is inelastic for the rich but elastic for the poor.

9. Price level: elasticity of demand tends to be great at high prices. In other words, demand is elastic at higher prices, unitary elastic at medium prices and inelastic at lower prices.

10. Joint Demand: Jointly demanded goods have less elastic demand. For example if the price of fountain pen falls it does not necessary lead to an increase in demand in the demand of ink.

11. Postponement: When goods is such that its consumption can be postponed demand for it is more elastic. For example in the rainy season the demand of a umbrella cannot be deferred and accordingly it is inelastic. However during winter when the demand can be postponed it is rather elastic.

12. Future Expectations about Price Changes: It also affects the nature of the elasticity of demand. If we expect a fall in price the demand will be elastic and if we expect a rise in price the demand will assume the character of inelasticity.

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