Elasticity of Demand & Factors Determining Price Elasticity

The Elasticity of Demand, also referred to as the Price Elasticity of Demand. Alfred Marshall was the first economist to introduce the concept of elasticity of demand into economic theory. He said that the elasticity of demand n a market is great or small according as the amount demanded increases much or little for a given fall in price,and diminishes much or little for a given rise in price.

Definition of Price Elasticity:

The elasticity of demand for a commodity is the rate at which quantity bought changes as the price changes.” _A.K. Carincross

Elasticity of demand measures the responsiveness of demand to changes in price.” _K.E.Boulding

The concept thus refers to the rate at which the demand for a good responds to a change in its price. It assumes that income of people and price of related goods remain the same. As it measures the relationship between changes in price and consequent changes in demand it is called price elasticity.

Factors Determining Price Elasticity:

1. Nature of commodities:Elasticity of demand of a commodity is influenced by its nature. A commodity for a person may be a necessity, a comfort or a luxury.

i. When a commodity is a necessity like food grains, vegetables, medicines, etc., its demand is generally inelastic as it is required for human survival and its demand does not fluctuate much with change in price.

ii. When a commodity is a comfort like fan, refrigerator, etc., its demand is generally elastic as consumer can postpone its consumption.

iii. When a commodity is a luxury like AC, DVD player, etc., its demand is generally more elastic as compared to demand for comforts.

iv. The term ‘luxury’ is a relative term as any item (like AC), may be a luxury for a poor person but a necessity for a rich person.

2. Availability of substitutes: Elasticity of demand depends upon availability of substitutes.”The main cause of difference in the responsiveness of the demand for goods to changes in their prices lies in the fact that there are more competing substitutes for some goods than for others”. For instance, if the price of coffee rises,we may curtail its purchases and take to tea and vice versa.

3. Number of Uses: If the commodity under consideration has several uses, then its demand will be elastic. When price of such a commodity increases, then it is generally put to only more urgent uses and, as a result, its demand falls. When the prices fall, then it is used for satisfying even less urgent needs and demand rises.

4. If the use can be postponed: If the use of commodity can be postponed we buy it only when its price is sufficiently low. If its price rises we postpone buying it. This can happen in the case of durable goods. In such cases demand tends to be elastic.

5. Proportion of income spent on a commodity: If the proportion of one’s income spent on a commodity is very small,demand for it does not change for small changes in price.Demand in such cases tends to be inelastic.

6. Level of Prices: Level of price also affects the price elasticity of demand. Costly goods like laptop, Plasma TV, etc. have highly elastic demand as their demand is very sensitive to changes in their prices. However, demand for inexpensive goods like needle, match box, etc. is inelastic as change in prices of such goods do not change their demand by a considerable amount.

7. Time period: Time also exerts considerable influence on price elasticity of demand. Demand is more elastic in the short run than in the long run. It can be a day, a week, a month, a year or a period of several years. Elasticity of demand varies directly with the time period. Demand is generally inelastic in the short period. It happens because consumers find it difficult to change their habits, in the short period, in order to respond to a change in the price of the given commodity. However, demand is more elastic in long rim as it is comparatively easier to shift to other substitutes, if the price of the given commodity rises.