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Questions
Discuss any four factors affecting price elasticity of demand.
Explain briefly the factors on which elasticity of demand depends.
Discuss any three/four factors determining price elasticity of demand.
State two factors determining price elasticity of demand.
Explain any four factors on which price elasticity of demand depends.
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Solution
- Nature of good: If the commodity is a necessity, its demand will not change much when its price changes. The elasticity of demand will be low. The demand for rice, wheat, etc., is relatively inelastic. The demand for luxury goods is elastic. When the price of televisions increases, some people may refrain from purchasing televisions. Hence the demand for televisions will fall and the elasticity of demand will be high.
- Alternative uses of goods: The elasticity of demand, which can be put to a variety of uses, will be relatively elastic. For example, electricity can be used for cooking, lighting, washing etc. When the cost of electricity increases, the consumers can cut down on some of the uses of electricity, confining themselves to the most urgent uses. Hence, the demand will be elastic.
- Income of the consumer: The elasticity of demand is also influenced by the income of the consumer. If the consumer is rich, he or she will not be bothered by small changes in prices. Such changes will leave the demand unaffected. The demand for this consumer will be relatively inelastic. A poor consumer, on the other hand, will attach importance even to small changes in prices and the demand will be elastic.
- Availability of substitutes: The elasticity of demand for a commodity also depends on the existence of substitute commodities. If substitutes exist, these will be used in place of the commodity in question when its price increases. The demand for this commodity will fall and will be elastic. This is how the existence of tea makes the demand for coffee elastic.
Notes
Students should refer to the answer according to their questions.
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| 1. Increase or decrease in demand for a commodity does not cause any change in its price. | (a) Effect on supply, in the case of Perfectly Elastic Demand. |
| 2. Increase or decrease in demand causes a change in the price of the commodity. Equilibrium quantity remains constant. | (b) Effect on demand, in the case of Perfectly Inelastic Supply. |
| 3. Increase or decrease in demand cause a change in the price of the commodity. Equilibrium quantity remains constant. | (c) Effect on demand, in the case of Perfectly Elastic Supply. |
| 4. Increase or decrease in demand for a commodity does not cause any change in its price. | (d) Effect on supply, in the case of Perfectly Elastic Demand. |
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