Published by: Zaya
Published date: 15 Jun 2021
The determinants of elasticity of demand are discussed below:
The income of the consumer also affects the elasticity of demand. For high-income groups, the demand is said to be less elastic as the rise or fall in the price will not have much effect on the demand for a product. Whereas in the case of the low-income groups, the demand is said to be elastic and the rise and fall in the price have a significant effect on the quantity demanded. Such as when the price falls the demand increases and vice-versa.
The elasticity of demand for a product is determined by the proportion of income spent by the individual on that product. In certain goods, such as matchbox, salt a consumer spends a very small amount of their income, then even if their prices rise the demand for these products will not be affected to a great extent. Thus, the demand for such products is said to be inelastic.
The elasticity of demand also depends on the nature of the commodity. The product can be categorized as luxury, convenience, necessary goods. The demand for the necessities of life, such as food and clothing is inelastic as their demand cannot be postponed. The demand for Comfort Goods is neither elastic nor inelastic.
Whereas the demand for luxury goods is said to be highly elastic because even with a slight change in its price the demand changes significantly. But, however, the demand for prestige goods is said to be inelastic, because people are ready to buy these commodities at any price, such as antiques, gems, stones, etc.
The elasticity of demand also depends on the number of uses of the commodity. Such as, if the commodity is used for a single purpose, then the change in the price will affect the demand for commodities only in that use, and thus the demand for that commodity is said to be inelastic. Whereas, if the product has several uses, such as raw material coal, iron, steel, etc., then the change in their price will affect the demand for these commodities in its many uses. Thus, the demand for such products is said to be elastic.
Substitutes are goods that can be used in place of one another. The goods which have close substitutes are said to have elastic demand. Such as, tea and coffee are close substitutes and if the price of tea increases, then people will switch to coffee, and demand for the tea will decrease significantly. Whereas, if there are no close substitutes for a product, then its demand is said to be inelastic.
The elasticity of demand also depends on the complementary goods, the goods which are used jointly. Such as cars and petrol, pen and ink, etc. Here the elasticity of demand for a secondary commodity depends on the elasticity of demand of the major commodity. Such as, if the demand for a car is inelastic, then the demand for petrol will also be less elastic.
If the demand for a particular product cannot be postponed then, the demand is said to be inelastic. Such as, Wheat is required in daily life and hence its demand cannot be postponed. On the other hand, the items whose demand can be postponed are said to have elastic demand. Such as the demand for the furniture can be postponed until the time its prices fall.
The price range in which the commodities lie also affects the elasticity of demand. Such as the higher range products are usually bought by rich people, and they do not care much about the change in the price and hence the demand for such higher range commodities is said to be inelastic.
Also, the lower range commodities have inelastic demand because these are already low-priced and can be bought by any section of society. But the commodities in middle-range prices are said to have an elastic demand because with the fall in the prices the middle class and the lower middle class are induced to buy that commodity and therefore the demand increases.
These are the determinants of elasticity of demand that every firm should understand properly before deciding on the price of their offerings.