What is ‘elasticity of demand’? Explain the factors determining elasticity of demand.
Elasticity of demand refers to the degree of responsiveness of quantity demanded of a commodity to a change in its price (or any other factor).
The following are the factors influencing elasticity of demand:
- 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.
- 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 that has close substitutes is relatively elastic. However, salt has no substitute and therefore, its demand is always inelastic.
- Composite Commodities:- Commodity having several uses tends to be more elastic in demand. For example; electricity can be used for several uses such as lighting, cooking, heating, etc however, a dingle-use commodity has an inelastic demand.
- Urgency:- If wants are more urgent, demand becomes relatively inelastic. If wants can be postponed, demand becomes relatively elastic.
- Habits:- Habits make a demand for certain goods inelastic, for example; cigarettes, drugs, liquor.
- Income:- Demand for goods is usually inelastic if the consumer has a high income.
- 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 the purchase of essential items like food grains, salt, etc., cannot be postponed, and therefore, the demand for such goods is inelastic.
- 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 equipment like water pumps, etc.
- Durability: The demand for durable goods is relatively elastic. For example, furniture, washing machine, etc. Demand for perishable goods is inelastic. For example, milk, vegetables, etc.
Elasticity of Demand: Elasticity of demand means responsiveness of demand due to change in the price of the commodity, income of the consumer and price of the related goods.
Three factors/determinants of elasticity of demand are:
- Own price of the commodity: Other things being equal, with a rise in own price of the commodity, its demand contracts, and with a fall in price, its demand extends. This inverse relationship between the own price of the commodity and its demand is called the law of demand.
- Income of the consumer: Change in the income of the consumer also influences his demand for different goods, the demand for normal goods tends to increase with an increase in income and vice versa. On the other hand, the demand for inferior goods like Coarse grain tends to decrease with an increase in income and vice versa.
- Expectations: If the consumer expects a significant change in the availability of the concerned commodity in the near future, he may decide to change his present demand for the commodity. If he expects a rise in price in the future, he will purchase today and if he expects a fall in price in the future he postpones his demand.
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