Question

State and explain the factors influencing the elasticity of demand.

What are the factors influencing the elasticity of demand?

Explain the factors influencing the elasticity of demand.

Answer 1

The factors influencing the elasticity of demand are as follows:

1. Nature of Commodity: By nature, we can classify commodities as necessities, comforts, and luxury goods. Demand for necessities like foodgrains, medicines, and textbooks is relatively inelastic, whereas demand for comforts and luxury goods like cars, perfumes, and furniture is relatively elastic.
2. Availability of Substitutes: Demand for a commodity will be more elastic if its close substitutes are available in the market. For example, lemon juice, sugarcane juice, etc. But if commodities have no close substitutes, like salt, the demand will be inelastic.
3. Number of Uses: Single-use goods have a less elastic demand. Multi-use goods have more elastic demand. For example, coal, electricity, etc.
4. Habits: Habits make the demand for certain goods relatively inelastic. For example, addictive goods, drugs, etc.
5. Durability: The demand for durable goods is relatively elastic. For example, furniture, washing machines, etc. Demand for perishable goods is inelastic. For example, milk, vegetables, etc.
6. Complementary Goods: The demand for a commodity that is used in conjunction with other commodities to satisfy a single want is relatively inelastic. For example, a fall in the price of mobile handsets may lead to an increase in demand for SIM cards.
7. The Consumer’s Income: Demand for goods is usually inelastic when the consumer has a high income. The demand patterns of a very rich and an extremely poor person are rarely affected by significant price changes.
8. Urgency of Needs: Goods that are urgently needed will have relatively inelastic demand. For example, medicines and luxury goods that are less urgent have relatively elastic demand.
9. Time Period: Elasticity of demand is always related to the period of time. It varies with the length of the time period. Generally speaking, the longer the duration of the period, the greater the elasticity of demand and vice versa. This is because a consumer can change their consumption habits in the long run in favour of cheaper substitutes for the commodities.
10. Proportion of Expenditure: If the proportion of expenditure in a person's income is small, then demand for the product is relatively inelastic. For example, newspapers. If the proportion of expenditure is large, then demand for the product is relatively elastic.