Question

Write a short note on factors determining elasticity of demand.

Answer 1

There are several factors that influence the price elasticity of demand. The factors make the demand for a commodity either elastic or inelastic.

The Factors are as follows:

1. Nature of the commodity: Demand tends to be relatively elastic for luxuries and comforts such as “Air Conditioners”. And demand is inelastic for necessary items such as Salt.
2. Availability of substitutes: The greater the number of substitutes available for a commodity, the greater would be the elasticity of demand for that commodity. In other words, the demand for a product which has close substitutes is relatively elastic. However, salt has no substitute and therefore, its demand is always inelastic.
3. Composite Commodities: Commodity having several uses tends to be more elastic in demand. For examples; electricity can be used for several uses such as lighting, cooking, heating, etc however, a single use commodity has inelastic demand.
4. Urgency: If wants are more urgent, demand becomes relatively inelastic. If wants can be postponed, demand becomes relatively elastic.
5. Habits: Habits make demand for certain goods inelastic, for examples; cigarettes, drugs, liquor.
6. Income: Demand for goods is usually inelastic if the consumer has high income.
7. Postponement of Consumption: The demand is elastic if we could postpone the purchase of goods and services such as in the case of electronic goods. But purchase of essential items like food grains, salt, etc., cannot be postponed, and therefore, the demand for such goods is inelastic.
8. Complementary Goods: When a good is linked with the use of other goods, demand may be inelastic or elastic depending on the demand for complementary goods. For example, the demand for petrol or diesel depends on the use of automobiles, agricultural equipments like water pumps, etc.