Question

Explain briefly the factors on which elasticity of demand depends.

Answer 1

1. Nature of the Commodity: It is an important determinant of price elasticity. Elasticity of demand for necessities of life, such as foodgrains, medicines, textbooks, edible oil, etc., is very low in comparison to luxury goods where price elasticity is quite high. The consumers will buy almost the same quantity of a necessary commodity per unit of time whether its price is somewhat higher or lower. On the other hand, demand for luxury goods (e.g., precious clothes, big-sized colour TV sets), are elastic. When prices of such commodities rise some people may avoid purchasing them. Their demand will fall sharply.
2. Availability of Substitutes: Secondly, demand for a commodity will be more elastic, if its close substitutes are available in the market.
3. Number of Uses: Thirdly, the elasticity of demand for a commodity also depends upon the number of uses it can be put to. The greater the number of uses of a commodity, the higher is the price elasticity of demand.
4. Possibility of Postponement: Fourthly, elasticity of demand also depends upon the possibility of postponing the purchase of a commodity. If the demand for a particular commodity can be postponed for sometime, its demand will be elastic or vice versa.
5. Proportion of Total Expenditure: Fifthly, elasticity of demand for a commodity also depends upon the proportion of income spent by a consumer on that commodity.
6. Habits: Those goods which have become habitual necessities for the consumers, have low price elasticity.
7. Time Period: Elasticity of demand is always related to period of time. It varies with the length of time period. Generally speaking, the longer the duration of period, the greater will be the price elasticity of demand and vice versa. This is because of the fact that consumers can change their consumption habits in the long period (as compared to short period) in favour of cheaper substitutes of the commodity.
8. Joint Demand: Finally, joint demand for goods also affects the elasticity of demand.