Determinants of Price Elasticity of Demand

Availability of Substitutes:

The closer the substitute, the higher the price elasticity of demand. This is so because if there is the availability of close substitutes, then if the price of the commodity changes by a minimal amount, then people will start substituting it with its substitutes. Thus there is going to be a significant change in the demand for the commodity.

Nature of the Commodity:

If the commodity is a luxury good, then the price elasticity would be higher, i.e. the demand is more elastic for the luxury goods because the consumption of luxury goods could be postponed if the price of them increases. However, the demand for necessary goods is inelastic in nature because even if their price changes, their consumption is almost necessary for the consumer, and he cannot postpone his demand for necessary goods when their prices increase. On the other hand, the demand for comforts is more elastic than that of necessities and less elastic than the demand for luxuries.

The Proportion of Income Spent:

If the proportion of income spent on the purchase of a good is too small, then its demand is inelastic and vice versa; this is so because even if the price of these goods increases, then it leads to almost no change in their consumption. For example salt, match box etc.

Time Factor:

If the purchase of a good could be postponed, then it has lesser elasticity, and if it cannot be, then it has a higher elasticity. In short, the shorter the time taken, the greater the elasticity. For instance, if the price of a TV reduces then people who have better purchasing power will buy it, and hence its demand will increase because of the short time taken for purchasing it. However, if people could postpone their purchase, then even if its price has decreased demand will not increase.

Alternative Uses of the Commodities:

The wider the range of alternative uses of a product, the higher the elasticity of its demand for a decrease in price and the lower elasticity for a rise in price. For instance, milk, water, electricity etc.

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21. Price Elasticity of Supply and Its Determinants
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33. Law of Returns to Scale
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56. Perfect Competition: Demand Curve
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