Factors Affecting Elasticity Of Demand: 9 Major Factors Explained

Share this:

The following are some of the most important reasons for a commodity’s elasticity of demand:

  • Changes in price do not always result in proportionate changes in demand.
  • For example, a modest increase or reduction in the cost of air conditioners might have a large influence on their demand.
  • In other words, different items have varying degrees of sensitivity to price changes.

Demand elasticity is a function of numerous elements, including:

Nature of commodity

The nature of a commodity’s demand is affected by its category. A necessity, a luxury, or a comfort for one person may be a want for another.

  • A commodity’s demand is usually inelastic when it is required for human survival, as was the case with food grains, vegetables, drugs, and other items.
  • When a commodity is a pleasure, such as a fan or refrigerator, demand for it is typically elastic because consumers can delay their purchases.
  • When a commodity is considered a luxury, such as air conditioning, DVD players, and so on, its demand is typically more elastic than that for comforts.
  • The word “luxury” is a relative term, since any item (such as air conditioning) may be a luxury for a poor individual but a necessity for a rich one.

What are Metrics and Why are they Important? Explained In Detail

Availability of substitutes

With many comparable options, a commodity with a small number of producers will have a more elastic demand. This is because even a minor increase in the price of anything makes consumers seek for alternatives. When the price of Pepsi rises, customers are pushed to buy Coke and vice versa.

On the one hand, when close alternatives are available, demand is sensitive to changes in price. On the other hand, because there are few or no substitutes for commodities like wheat and salt, their demand is less elastic.

Income Level

In comparison to individuals with low earnings, elasticity of demand for any product is generally lower for higher income groups. This occurs as a result of the fact that wealthy people are less affected by changes in the price of items. Poor folks, on the other hand, are severely influenced by changes in the price of goods. As a consequence, demand for lower-income persons is highly elastic.

Level of price

The elasticity of demand varies depending on the price of a product. The demand for costly goods, such as laptop computers, plasma TVs, and so on, is highly elastic since their demand is very responsive to changes in pricing. Demand for low-cost products like match boxes and needles, on the other hand, is inelastic because a change in prices does not significantly alter demand.

Explained: Top 6 Factors of Social Change

Postponement of Consumption

The demand for commodities like biscuits and soft drinks, which are not in a hurry, is highly elastic. Their consumption can be delayed if their prices rise. Inelastic demand exists for commodities with necessary demand, such as life-saving medicines.

Number of Uses

When the demand for a commodity is elastic, it means that it has several applications. When the price of such a product rises, it is generally put to only more essential uses, which results in demand decreasing. When prices fall, people use the supplies less frequently to meet even less pressing demands and demand grows.

Electricity, for example, is a multi-use good. When the price of electricity falls, demand for it will rise significantly, especially in applications (such as air conditioning, heat convection, and so on) where it was previously not used due to its high cost. A commodity with no or few alternative uses has more inflexible demand.

Share in Total Expenditure

The elasticity of demand for a product is also influenced by the proportion of people’s income spent on it. The elasticity of demand for a commodity is higher if consumers spend a larger percentage of their income on it.

The demand for goods like salt, needles, soap, match boxes, and other commodities is often inelastic because consumers spend a tiny fraction of their money on them. When the price of such items rises, customers continue to buy almost the same amount. However, if a commodity’s share of income is significant, demand for it will be elastic.

Time Period

A period of time is always required for the calculation of demand elasticity. It might be a day, a week, a month, a year, or even several years. Demand elastance varies directly with the time frame. In the short term, demand is typically inelastic.

Because consumers find it tough to change their behaviors in a short time, they are less likely to act on an increase in the price of a particular commodity. In contrast, long rim demand is more elastic since it is easier to substitute to alternatives if the price of the product rises.

Habits

Commodities, which have become standard items for consumers, have less elastic demand. This is due to the fact that such a commodity becomes a need for the consumer, and he continues to purchase it even when its price rises. Alcoholic beverages, cigarettes, and other smoking products are examples of habit-forming commodities.

Finally, elasticity of demand for a commodity is influenced by numerous factors. However, it’s impossible to say which element or mix of variables has the most impact. It all boils down to the specifics of each scenario.

Share this:

Leave a Reply

Your email address will not be published.