Factors that calculate price elasticity of demand, Microeconomics

Factors that calculate price elasticity of demand:


The proportion of Income spent on the Commodity

If the price of a good is relatively low such the expenditure on it is an insignigicant fraction of most individual or family incomes, then consumers of such a commodity are insensitive to a price change of the good. It tends to have inelastic demand. On the other hand, if the price is high the proportion of income)s) spent on it is large than it tends to have elastic demand. For example, salt has relatively low price in Ghana and families spen insignificant percentage of their incomes on salt. Therefore, even if the price of salt doubles, people find little difficulty in buying the same quantity they used to buy.


Time

The demand for a product tends to be more elastic in the longer period of time ad less elastic in the shorter period of time. This is because consumers need a longer time to adjust to changes in price. In the case of substitutes like elasticity and gas cooker, if the price of electricity goes up it will take time for consumers to switch over from electricity cooker to gas cooker for consumers need time to acquir the gadgets.

Posted Date: 1/2/2013 7:01:19 AM | Location : United States







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